Question

QUESTION 11 The following inventory information was taken from the records of ABC Co. for YEAR 1: Historical Cost $12.000 Replacement Cost $7.000 Expected Selling Price $9.000 Expected Selling Cost $500 Normal Profit Margin 20% of selling price Required: Journalize the outcome for Year 1, and show all work in detail using US GAAP and IFRS.

Answer 1

According to US GAAP and IFRS, Historical cost is the original cost where inventory firstly bought .

so as per accounting principles and policies inventories are to be shown at lower of the following amount.

1. Market price on the date of recording into balance sheet .

2. and actual selling price less any expenditure to be incurred to sell the same inventory into market.

but, if the actual selling cost is less than replacement price than, the loss should be recorded into books of accounts.

In the given problem ,

historical cost =   $12000

Replacement price = $7000

Expected selling cost = expected selling price - sales margin - expected selling cost = $9000-20%-$500 = $6700

so, as per applicable GGAP and IFRS we will show it at lower of replacement cost and expected selling cost and if expected selling cost is lower than replacement cost than the loss should be recognized .

so finally we will record inventory at $ 6700 and record $ 300 as loss on valuation of inventory