Question

QUESTION 1 Midas Ltd is a conglomerate that produces its consolidated financial statements for the year ended 31 December 20X7. John Poor, the accountant of Midas Ltd, had been reviewing the financial statements of Fencing Ltd, a recently acquired subsidiary that carries on business as a fencing company, and considered the rate of inventories and sales to be unexpectedly high. In response to his enquiry, Fencing Ltd. produced the following information concerning the inventories Inventories were made up of raw materials at a cost of $86,000 and finished goods at a cost of $27,000 The raw materials consisted of 8,600 metres of teak fencing of $10 per metre. The finished goods consisted of 10 security gates that the company had manufactured in its own foundry at a cost of $1,500 each and 1,000 metres of metal fencing manufactured in the foundry at a cost of $12 per metre. (1) Raw materials Cheap supplies of teak had started coming into the country in January 20X8 from Indonesia at a list price of $5 per metre. The trade press had described these imports as dumping and had been making representations to government of the imports. (2) Finished goods Security gates could from mid January 20X8 be imported from Germany at $750 per gate. The German supplier had recently invested in advanced technology and the company could not match its costs at its own foundry. REQUIRED (a) To state, with reasons, the amount of inventories at which you consider that they should appear in the statement of financial position of Fencing Ltd as at 31 December 20X7. (b) Prepare relevant journal entries in the general ledger if impairment exists in the inventory.

Answer 1

(a)

The inventories in the statement of Financial Position of Fencing Ltd. should appear at lower of cost or market value.

As at 31^st December, 2007, following should be the value of inventories:

(1) Raw Material: $86,000

(2) Finished Goods: $ 19,500

Reasoning:

(1) Raw Material: Cheap import supplies of teak shall not lead to the reduction in the value of the inventory since the trade press have described these imports as dumping.

(2) Finished Goods: Import of Security Gates from Germany at $ 750 will lead to write down of the value of finished goods. Fencing Ltd shall not be able to sell the gates at the price over $ 750.

  (b) Journal Entry:

	Debit	Credit
Cost of Goods Sold	$ 7500
Finished Goods Inventory		$ 7500