The following independent situations occurred at the end of Year 2 and require a
ID: 2437241 • Letter: T
Question
The following independent situations occurred at the end of Year 2 and require an inventory report in the year-end financial statements. The dollar amounts provided in the table below are on a per-unit basis. In Situation 5., assume that the company is applying IFRS.
Select from the option list provided the appropriate measurement attributes for reporting inventory in the year-end financial statements. Each choice may be used once, more than once, or not at all.
5. (Under IFRS)
Answer Choices: ( Historical Cost, Net Realizable Value, Net Realizable Value minus Normal Profit Margin, Current Replacement Cost)
Situation Historical cost Estimated selling price Cost of completion Cost of disposal Current replacement cost Normal profit margin 1. $60 $70 -- $5 $55 $7 2. $50 $80 $20 $6 $53 $3 3. $45 $44 $3 $2 $40 $4 4. $29 $40 $4 $6 $28 $5 5. $100 $110 $15 $5 $82 $5Explanation / Answer
1. When inventory is accounted using the LIFO method, Inventory is valued at Lower of Cost or Market;
Cost: $60
Market: Middle of Ceiling, Floor and Replacement Cost
Ceiling = NRV = Estimated Selling Price - Cost to complete - cost to dispose = $70 - $5 = $65
Floor = NRV - Profit Margin = $65 - $7 = $58
Replacement cost = $55
Therefore, Market price is Floor.
Inventory is valued at lower of $60 or $58, Therefore inventory is valued at $58.
If the company accounts for its inventory using the LIFO method, It is valued at Net Realizable value minus Normal Profit Margin.
2. When Inventory is accounted for using any method other than LIFO or retail inventory method, it is valued at Lower of Cost or NRV;
Cost : $50
NRV: $80 - $20 - $6 = $54
Therefore Inventory is valued at cost ($50). Inventory is accounted for at Historical Cost.
3. When Inventory is accounted for using any method other than LIFO or retail inventory method, it is valued at Lower of Cost or NRV;
Cost : $45
NRV: $44 - $3 - $2 = $39
Therefore Inventory is valued at NRV ($39). Inventory is accounted for at Net Realizable Value.
4. When inventory is accounted using the LIFO method, Inventory is valued at Lower of Cost or Market;
Cost: $29
Market: Middle of Ceiling, Floor and Replacement Cost
Ceiling = NRV =Estimated Selling Price - Cost to complete - cost to dispose =$40 - $4 - $6 = $30
Floor = NRV - Profit Margin = $30 - $5 = $25
Replacement cost = $28
Therefore, Market price is Replacement cost.
Inventory is valued at lower of $29or $28, Therefore inventory is valued at $28.
If the company accounts for its inventory using the LIFO method, It is valued at current replacement cost
5. If the company follows IFRS, Inventories are always valued at lower of Cost or NRV;
Cost: $100;
NRV: $110 - $15 - $5 = $90
Therefore Inventory is valued at NRV($90). Inventory is accounted for at Net Realizable Value.
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