Question

QUESTION 2

Salju Bhd is a company that specialised in producing office furnishings for industry-customers as well as for walk-in customers. The furnishings are grouped based on its materials. The following information is available from the company’s inventory records as at 31 December 2017.

	Wooden Furniture (RM)	Bamboo Furniture (RM)	Rattan Furniture (RM)	Metal Furniture (RM)	Glass Furniture (RM)	Acrylic Furniture(RM)
Historical cost – FIFO method (in total)	213,500	122,500	178,500	21,500	50,000	25,000
Estimated selling price (per unit)	4,125	4,375	5,125	1,875	2,500	750
Estimated cost to complete and sell (per unit)	750	1,750	3,500	1,000	1,250	375
Number of units	40	32	40	40	56	40

Inventories are recorded at their cost. However, due to the market intense competition and declining in demand for company’s product, the operation of Salju Bhd has also affected and its inventory has declined in value. Salju Bhd has taken an approach to follow the practice of valuing its inventory at the Lower of Cost or Net Realisable Value (LCNRV) method. Salju applies the loss method and uses an Allowance Account to record for the write down of the inventory to net realisable value.

REQUIRED:

(Round your answers to the nearest RM)

1. Assuming that Salju Bhd applies the LCNRV rule to each major groups of furniture. Determine the following items as at 31 December 2017:

1. Net Realisable Value (NRV) per major group,
2. Lower-of-Cost-or-NRV (LCNRV) per major group, and
3. The final amount of inventory.

2. Prepare the journal entry at 31 December 2017 to account for the write-down of the inventory to NRV. Assuming the use of a perpetual inventory system.
3. Show a partial of Salju Bhd statement of financial position as at 31 December 2017 to present the information on its inventory.
4. Assuming that at the year-end 2017, the account of Allowance to Reduce Inventory to NRV had a credit balance of RM300,000. For the financial year end 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory at Net Realisable Value. Prepare the related journal entry.

e. Explain how the application of LCNRV approach may result inconsistency in terms of its inventory measurement.

Answer 1