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Hi there,
Hope you are all safe,
I have an issue with the question 31 a of the past paper September December 2019 about the inventory adjustments.
It states:Inventory adjustment
The disposal of the inventory at a discounted price would be classified as an adjusting event in accordance with IAS® 10 Events
After the Reporting Period.
Retail price of the inventory $1·5 million; GP margin 20% = $0·3 million
Closing inventory (currently credited to SOPL) $1·2 million
A write down to NRV would require a $0·6m charge to cost of sales thereby increasing it to $70·6 million and reducing profit
from operations to $12·56 million. In the statement of financial position, inventory is written down to $3·36 million and
retained earnings will be adjusted to $32·28 million.I am not so sure how do they find this NRV amount and how do they find this 0.6M to be charged in the SPL. I only assume that the question said: inventory were sold at 50% of what it had cost so then I would assume the 1.2 M at 50% gives me 0.6M.
If someone could explain it more in details?
Thanks
Hi,
If we were to sell the inventory at $1.5 million and this is based on a cost structure of 20% gross profit margin then the cost would be 80% of the selling price, i.e. $1.2 million.
The inventory will have been valued at the lower of cost and NRV, therefore it will have been recorded at $1.2 million.
We’re then told that they are going to discount it to half of its cost. This therefore reduces the inventory by $0.6 million (50% x $1.2 million) to its new value of $0.6 million.
We therefore need to reduce the inventory by this amount on the SFP and reduce profits by the same amount. To reduce the profits we would increase the cost of goods sold.
Hope that clears it up a bit.
Thanks
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