Question

Company A is using allowance method for recording valuation updates of inventory for preparation of financial statements. At the end of year N, the ending value of inventories was 37,000 TL with an estimated selling price 42,000 TL and 4,000 TL selling costs. At the end of year N+1, the ending value of inventories was 35,000 TL with an estimated selling price 32,000 TL and 1,000 TL selling costs. At the end of year N+2, the ending value of inventories was 38,000 TL with an estimated selling price 40,000 TL and 3,000 TL selling costs.

Indicate the followings:

1- At what value will the inventory be reported in Statement of Financial Position at the end of year N?

2- At what value will the inventory be reported in Statement of Financial Position at the end of year N+2?

3- What is the ending balance of allowance for inventory at the end of year N?

4- What is the ending balance of allowance for inventory at the end of year N+1?

5- What is the ending balance of allowance for inventory at the end of year N+2?

6- What is the value of impairment loss for inventory at the end of year N+1?

Answer 1

Inventory is reported on the balance sheet at lower of cost of net realizable value.

Net realizable value (NRV) is calculated as under:

NRV = Estimated selling price - Estimated selling cost

1. For the end of the year N

Original cost = 37000 TL ( It is ending value of the inventory given in question)

NRV = 42000 TL - 4000 TL = 38000 TL

Here, Cost < NRV

Hence, the inventory reported in Statement of Financial Position at the end of year N will be 37000 TL.

3. Ending balance of allowance at the year end N will be

38000 TL - 37000 TL = 1000 TL ........... (i)

2. As per US GAAP, no inventory written up is allowed.

Original cost = 38000 TL ( It is ending value of the inventory given in question)

NRV = 40000 TL - 3000 TL = 37000 TL

Here, Cost > NRV

Hence, the inventory reported in Statement of Financial Position at the end of year N+2 will be 37000 TL.

4. For the end of the year N+1

NRV = 32000 TL - 1000 TL = 31000 TL

Cost = 35000 TL (It is ending value of the inventory given in question)

Allowance = 31000 TL - 35000 TL = - 4000 TL .........(ii)

Hence, from equation (i) & (ii)

Final allowance reported at the end of year N+1 will be

1000TL + (-4000) TL = - 3000 TL