Question
Kingsley Textiles measures inventory at the lower of cost and net realisable value (IAS 2).
| Date | Event |
|---|
| December 15 | Purchased inventory on account for $30,000. |
| December 31 | A year-end review shows inventory that cost $50,000 now has a net realisable value of only $44,000. |
Required: Prepare the entry for the December 15 purchase and the December 31 entry to write the inventory down to net realisable value. Record the write-down through Cost of Goods Sold.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 2 — Inventories
Cost includes purchase price, import duties, transport and handling, less trade discounts and rebates. The cost formula — FIFO or weighted average — is then applied consistently to inventories of a similar nature and use.
Common mistakes
- Recomputing the weighted average only at the period end when a moving average is required under a perpetual system.
- Including selling costs or storage of finished goods in inventory cost.
- Switching cost formula between periods without treating it as a change of accounting policy.
IFRS vs US GAAP: US GAAP permits LIFO; IAS 2 prohibits it.
Further readingIAS 2: costing methods and NRV