Question

Required: Answer the following questions regarding inventory valuation at the year-end using both US GAAP and IFR On December 31, 2017, Jets International had an inventory of five different types of airplane parts that were accounted for on the LIFO inventory method. Given the current fuel costs, airplane parts are not as valuable as they once were. The chart below provides the cost basis, net realizable value, replacement cost and net realizable value ess normal profit as of December 31, 2017. Cost NRV RC NRV-NPM $ 10,000 $ 20,000 $ 19,000 $ 12,000 $ 17,000 15,000 Part 20,000 S18,000 Part 2 Part 3 $ 5,000 $ 8,000 3,000 $15,000 $ 12,000 4,000 2,000 $ 11,000 12,000 Part 4 $ 15,000 Part 5 9,000 11,000 1. What is the amount of write-down (if any) required using US GAAP on item-by-item basis? Please provide the necessary journal entries 2. What is the amount of write-down (if any) required using IFRS on an item-by-item basis? Please provide the necessary journal entries The airline industry's business was so terrible during 2018, that Jets International still had the same five parts in its inventory as of December 31, 2018. However, fuel prices have decreased, so the outlook is more optimistic. As of the end of the year, Jets International's original cost basis, net realizable value, replacement cost and net realizable value less the normal profit were as follows. Original Cost RC NRV NRV-NPM $ 10,000 $ 20,000 $ 16,000 $ 19,000 21,000 13,000 Part $ 20,000 Part 2 18,000 3,000 12,000 Part 3 $ 5,000 8,000 4,000 16,000 14,000 5,000 $ 11,000 $ 10,000 $ Part 4 12,000 Part 5 15,000 3. What is the amount of write-down reversal (if any) required using US GAAP on item-by-item basis? Please provide the necessary journal entry What is the amount of write-down reversal (if any) required using IFRS on item-by-item basis? Please provide the necessary journal entry 4.

Answer 1

Solution: 1 and 2

Amount of write down using US-GAAP approach:

Under US GAAP Inventory is valued at Lower of cost or market value(LCM). Here market value is defined as the current replacement cost of the inventory as long as it does not exceed the net realizable value and is not less than the net realizable value less the profit margin.In other words, the replacement cost should be between net realizable value and net realizable value less the profit margin.

Amount of write down using IFRS approach:

Under IFRS, inventory is valued at lower of cost and Net realizable value(LCNRV)

	Cost	NRV	RC	NRV-NPM	LCM	LCNRV
Part 1	$10,000	$20,000	$15,000	$12,000	$10,000	$10,000
Part 2	$20,000	$19,000	$18,000	$17,000	$18,000	$19,000
Part 3	$5,000	$3,000	$4,000	$2,000	$3,000	$3,000
Part 4	$8,000	$15,000	$12,000	$11,000	$8,000	$8,000
Part 5	$15,000	$12,000	$9,000	$11,000	$11,000	$12,000
	$58,000				$50,000	$52,000

JOURNAL: Under US GAAP the amount of write down is transferred in income statement to cost of goods sold and directly to inventory as future reversals are not allowed.Whereas Under IFRS the write down is not transferred in a specific income statement account and instead a valuation allowance is created to allow for future reversals of write downs.

	Journal	Debit	Credit
UNDER US GAAP	Cost of goods sold	$8,000
	Inventory		$8,000
	(Being inventory write down by excess of cost over LCM= $58,000-$50,000= $8,000)
UNDER IFRS	Inventory write down expense	$6,000
	Inventory valuation allowance		$6,000
	Being inventory write down by excess of cost over LCNRV= $58,000-$52,000 = $6,000)

3) Under US GAAP no reversal of write down is allowed.

4)

	Cost	NRV	LCNRV
Part 1	$10,000	$21,000	$10,000
Part 2	$20,000	$20,000	$20,000
Part 3	$5,000	$4,000	$4,000
Part 4	$8,000	$16,000	$8,000
Part 5	$15,000	$14,000	$14,000
	$58,000		$56,000

So, under IFRS the inventory should be valued at LCNRV which is $56,000 on Dec 31,2018. But we had valued it at $52,000 on Dec 31,2017 by writing down $6,000 . Now we have to increase the inventory amount from $52,000 to $56,000 that is $4,000 for which we will reverse the previous write down by $4,000.

Journal Entry

Date	General Journal	Debit	Credit
Dec 31 , 2018	Inventory Valuation Allowance	$4,000
	Inventory Write down Expense		$4,000
	(Previous write down reversed as inventory amount increased in this year)