6. KTA Enterprises - has the following information regarding inventory as of 12/

Question

6. KTA Enterprises - has the following information regarding inventory as of 12/31/2017 Historical cost $1,000,000 Replacement cost $950,000 Net realizable value $960,000 Normal profit margin on inventory sales 20%

20%

What amount of inventory should be reported under U.S. GAAP as of 12/31/2017?

What is the amount of inventory loss shown on the income statement under U.S. GAAP as of 12/31/2015?

What amount of inventory should be reported under IFRS in 2015?

What is the amount of inventory loss shown on the income statement under IFRS in 2015?

As a result of inventory loss, what is the difference in income between reporting between U.S. GAAP and IFRS?

As a result of inventory loss, what is the difference in reporting Stockholders' Equity between U.S. GAAP and IFRS?

Historical cost $1,000,000 Replacement cost $950,000 Net realizable value $960,000 Normal profit margin on inventory sales

20%

What amount of inventory should be reported under U.S. GAAP as of 12/31/2017?

What is the amount of inventory loss shown on the income statement under U.S. GAAP as of 12/31/2015?

What amount of inventory should be reported under IFRS in 2015?

What is the amount of inventory loss shown on the income statement under IFRS in 2015?

As a result of inventory loss, what is the difference in income between reporting between U.S. GAAP and IFRS?

As a result of inventory loss, what is the difference in reporting Stockholders' Equity between U.S. GAAP and IFRS?

Explanation / Answer

Question 1

Under US GAAP, inventory is to be valued at lower of cost of market value.

The market Value is computed as NRV - Designated Profit Margin = 960,000 - 20% = 768,000.

Inventory Value as per GAAP is the lower of $1,000,000 and $768,000 = $768,000

Question 2

Since the Market value is lower than the cost of $1,000,000, inventory loss of (1,000,000 - 768,000) = $232,000 is recognized under GAAP

Question 3

Under IFRS, inventory is recognized at lower of Cost and NRV

Hence inventory will be recognized at the NRV of $960,000

Question 4

The inventory loss to be recognized under IFRS is $1,000,000 - $964,000 = $36,000

Question 5

Under GAAP an excess loss of ($232,000 - $36,000) = $196,000 is recognized. Hence the income under GAAP will be lower than IFRS income by $196,000

Question 6

Under IFRS, the Stockholders Equity will be higher by $196,000

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