Question

BAR Ltd has 300 lampshades on hand, which are now considered to be out of fashion. They cost €3.87 to make originally. A customer has offered to buy them for €2.00 each but BAR Ltd. would have to pay total delivery costs of €100. Alternatively the lampshades could be reworked into a more fashionable style for a cost of €0.68 per shade. These shades could then be sold for €4.00 if the company spent a total of €150 on selling and distribution costs. The lampshades should be stated in the annual accounts at a value of:

Answer 1

The Original Cost of LampShades = 300 Lampshades * 3.87$ = 1,161$

Net Selling Price if sold = 2$ * 300 Lampshades - 100$ = 500$

If Reworked the Net Selling Price = 4$ * 300 Lampshades - 0.68$ * 300 Lampshades - 150$ Selling & Distribution Costs

= 1,200$ - 204$ - 150$

= 846$

As per Accounting Rule Valuation of Inventory should be Cost or NRV whichever is Less.

So Lampshades should be accounted in Annual Accounts @ 846$ ( Lower of 1,161 Cost & 846$ NRV)

Note:The company will sell after reworking only because it is giving high value as compared to directly selling the same.