Question

A. Based on the fundamental principle of IAS2, identify two (2) circumstances where the NRV of inventory might be lower than its cost?

B. Storm Inc. had 500 units of Product X at 30 June 2020 in inventory. The product had been purchased at list price of $18 per unit and normally sells for $24 per unit.

Additional information relating to the units in inventory: VAT – 10%; wharehousing cost - $0.40 per unit; purchase discount - $0.55 per unit; carriage inwards - $0.60 per unit.

Recently , Product X started to deteriorate but can still be sold for $24 per unit, provided that some rectification/re-packaging work is undertaken at a cost of $3 per unit.

Required:

At what amount would Product X be required to be stated on 30 June 2020? Provide detailed analysis to support your answer

Answer 1

A. Some of the Circumstances where NRV might be lower than cost of inventory are:

• When inventory becomes damaged or obsolescence
• When there is a decline in selling price of the inventory
• When there is increase in estimated costs to complete and
• Market of inventories.

B. Product X can be stated at $ 10,125 on June 30,2020

explanation:

computation of cost of purchase:

	amount($)
Basic purchase price	18
Add:
Non-refundable taxes and duties(VAT)	1.8
Inward freight cost	0.6
All other ocsts incurred directly to bring the inventory to present location and condition:
Wharehousing cost	0.4
Less:
Purchase discount	(0.55)
Total cost of purchase per unit	20.25

Total cost of purchase for 500 units is 500*$ 20.25 = $ 10,125

Now,

Computation of NRV:

Estimated selling price per unit	$ 24
Less: cost to make the sale
(Cost of re packing)	($ 3)
Net realisable value per unit	$ 21

Net realisable value for 500 units = 500*$ 21 = $10,500

now,

inventory can be valued at cost or NRV, which ever is LOWER

i. e, lower of $ 10,125 or $ 10,500 = $10,125