Question

The financial statements of PLC Pte Ltd had been completed but not yet released to shareholders. The closing inventory of PLC Pte Ltd amounted to $332,000 as at 31 December 20X1, its financial year-end. This total included two products with the following information:

(i) 150 units of Product A were carried at a cost of $12 each. On 2 January 20X2, they were sold for $9 each, with total selling expenses of $100.
(ii) 300 units of Product B were carried at a cost of $15 each. The products were found to be defective on 31 December 20X1. On 2 January 20X2, remedial work was conducted and cost $700 and shortly after, they were then sold for $20 each. The selling expenses were $250.

Illustrate and explain the accounting treatment by PLC Pte Ltd for the above.

Answer 1

1.

The closing inventory of PLC Pte Ltd amounted to $332,000 as at 31 December 20X1,

The Inventories are valued at cost or Net realisable value whichever is lower.

Now NRV i.e Net realisable value is the sell value of the stock less any cost to sales.

Here in the financial statement generally cost of inventory is shown but in case where NRV is less then the inventory should be shown at NRV on the balancesheet.

1). 150 units of Product A is having a cost price of $12 each , thus making the total cost = $1800

now its sale price per unit is $9 each on 2nd january after the year end and selling cost = $100,

Thus Net realisable value = Sales - cost to sales = (150*9 ) - $100 = 1350-100 = $1250.

The Net Realisable value is $1250 which is less than the cost of $1800 by $ 550,

Hence the Inventory with respect to product A should be shown at $ 1250.,

However if it is shown at cost then its value is to be reduced by $550 to comply with the standards.and to be shown at Net realisable value.

Thus the closing Inventory to be shown = $331450 ( 332000- 550).

2. 300 units of B was carried at a cost of $ 15 each, thus total cost of product B= $4500 (300*15)

Further on the closing date it was found defective, hence to make it feasiable for selling purpose additional cost to sales is incurred of $700.

In january it is sold @20 each , hence sale value = $ 300*20 = $6000 , with an additional selling cost of $250.

Hence net realisable value = Sale value - cost to sales = 6000 - 700 - 250 = $ 5050.

Since the net realiasable value is more than the cost , Inventory value will not be changed if shwon at cost in the closing inventory.

There will be no change for product B's Inventory as cost is less than NRV in this case.