Question

Question 3

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

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 - $0.55 per unit; purchase discount - $0.40 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

Answer :

This simply means that if inventory is carried on the accounting records at greater than its net realizable value (NRV) a write down from the recorded cost to lower NRV would be made. In essence, the inventory account would be credited, and a loss for decline in NRV would be the offsetting debit

The net realizable value of inventory may fall down because of invcrease in cost, fall in selling price, physical damage or obsolescence.

Calculation of the cost of the unit

Particulars	Amount
List price	18
Vat (10%)	1.8
Warehousing cost	0.55
Purchase discount	0.4
Carriage inward	0.6
Repackinging cost	3
Total cost	24.35

It is said that the given stock can be sold for 24 rupees, by the above calculation we arrived at the cost of 24.35

As per IAS 2, inventory is valued at cost or NRV whichever is lower. Therefore it should be valued at 24 (NRV)