Question

Topic: Inventory Valuation National Drilling is a manufacturer of drill bits for large oil rigs that operate around the world. A major component in the manufacturing of the drill bits is diamonds. As a result of an increase in oil drilling due to the increase in oil prices, National Drilling has received, and is expected to receive, an increase in orders for new and replacement drill bits. With such a potential demand, National Drilling has purchased a large quantity of diamonds. Since diamonds are considered a precious metal, National Drilling is contemplating the proper valuation of its inventory, which is currently above cost.

Management has concluded that precious metals with a fixed monetary value and without substantial marketing costs can be recorded at market value, as discussed at a recent oil and gas conference that National’s accounting staff attended. As a member of the staff, you question the proper valuation of the diamond inventory.

Required: Utilizing the FASB’s Codification, determine with specific authoritative reference the proper valuation of the diamond inventory. What specific Codification references support your conclusion?

Answer 1

According to the FASB paragraph 330-10-35-15, “Only in exceptional cases may inventories properly be stated above cost. For example, precious metals having a fixed monetary value with no substantial cost of marketing may be stated at such monetary value; any other exceptions must be justifiable by inability to determine appropriate approximate costs, immediate marketability at quoted market price, and the characteristic of unit interchangeability.” Since the precious metal has a fixed monetary value with no substantial marketing costs, it can be concluded that National Drilling may value the diamonds at market value.