Question

Alejandro Limited is a public company that uses the lower-of-cost or ne realizable value (NRV) rule under the allowance method for reporting inventory on its Statement of Financial Position using the. The company also uses a perpetual inventory control system. At the end of 2018, Alejandro Inc. had four items in its inventory (not living animals), two o which management believed should be written down. The cost and NRV of the items are as follows: Item A Quantity Cost 170 NRY 100 160 Item B 260 80 Item C 9 100 150 140 Item D 200 100 120 Required: Calculate the amount by which the inventory should be written down if the lower-of-cost or NRV rule is applied on an item-by-item basis. Prepare the corresponding journal entry to record the write down. (3 marks) Assume Items A and B are related while Items C and D are also related. Calculate the amount by which the inventory should be written down if the lower-of-cost or NRV rule is applied by category. Prepare the corresponding journal entry to record the write down. (3 marks) Suppose that in 2019, the NRV of Item A rises to $180 by the end of the year. Prepare the journal entry to record the recovery in value, if any, under part (a). (3 marks) (d) Suppose that in 2019, the NRV of Item A rises to $180 by the end of the year. Prepare the journal entry to record the recovery in value, if any, under part (b). (3 marks) (e) Assume that the four items of inventory are living animals but not bearer plants. Describe the rule that must be followed by Alejandro Company under IAS 41 entitled "Agriculture" for measuring and reporting this inventory. (2 marks)

Answer 1

(a)			Quantity	Cost	NRV	Total cost	Total NRV	Lower of cost or NRV
			a	b	c	d=a*b	e=a*c	d
	Item A		100	170	160	17000	16000	16000
	Item B		260	80	90	20800	23400	20800
	Item C		150	140	100	21000	15000	15000
	Item D		200	100	120	20000	24000	20000
	Total					78800		71800
	Inventory to be written down=total cost-total lower of cost or NRV=78800-71800=$ 7000
	Journal entry:
	Date	Account titles and explanation					Debit	Credit
	Dec 31.	Loss on inventory write down					7000
		Allowance to reduce inventory to LCM						7000
		(Inventory written-off)
(b)			Quantity	Cost	NRV	Total cost	Total NRV	Lower of cost or NRV
			a	b	c	d=a*b	e=a*c	d
	Category 1
	Item A		100	170	160	17000	16000
	Item B		260	80	90	20800	23400
	Total	a				37800	39400	37800
	Category 2
	Item C		150	140	100	21000	15000
	Item D		200	100	120	20000	24000
	Total	b				41000	39000	39000
		a+b				78800		76800
	Inventory to be written down=total cost-total lower of cost or NRV=78800-76800=$ 2000
	Journal entry:
	Date	Account titles and explanation					Debit	Credit
	Dec 31.	Loss on inventory write down					2000
		Allowance to reduce inventory to LCM						2000
		(Inventory written-off)
c)			Quantity	Cost	NRV	Total cost	Total NRV	Lower of cost or NRV
			a	b	c	d=a*b	e=a*c	d
	Item A		100	170	180	17000	18000	17000
	Item B		260	80	90	20800	23400	20800
	Item C		150	140	100	21000	15000	15000
	Item D		200	100	120	20000	24000	20000
	Total					78800		72800
	Inventory to be written down=total cost-total lower of cost or NRV=78800-72800=$ 6000
	Journal entry:
	Date	Account titles and explanation					Debit	Credit
	Dec 31.	Loss on inventory write down					6000
		Allowance to reduce inventory to LCM						6000
		(Inventory written-off)
(d)			Quantity	Cost	NRV	Total cost	Total NRV	Lower of cost or NRV
			a	b	c	d=a*b	e=a*c	d
	Category 1
	Item A		100	170	180	17000	18000
	Item B		260	80	90	20800	23400
	Total	a				37800	41400	37800
	Category 2
	Item C		150	140	100	21000	15000
	Item D		200	100	120	20000	24000
	Total	b				41000	39000	39000
		a+b				78800		76800
	Inventory to be written down=total cost-total lower of cost or NRV=78800-76800=$ 2000
	Journal entry:
	Date	Account titles and explanation					Debit	Credit
	Dec 31.	Loss on inventory write down					2000
		Allowance to reduce inventory to LCM						2000
		(Inventory written-off)