Question

You are a plant accountant for Kelly Corp. You have been asked to draft a brief (1- to 1.5 page) issues memo ("to the files") documenting the accounting for the following issue. Kelly Corp has leased a mine from which it recently extracted 1,000 kilograms of bauxite (a mineral that can be used to make aluminum). Kelly Corp plans to sell the bauxite to aluminum manufacturers. Kelly Corp is analyzing whether its bauxite inventory can be carried at its selling price per ASC 330-10-35-16(b). Assume that quoted market prices are generally available for bauxite, and that the market for bauxite is active. Using the standard memo format, analyze whether all necessary conditions are met for the accounting treatment proposed. If assumptions are needed to fully evaluate the guidance, identify those assumptions in your analysis. For this particular memo, you are not required to present alternative treatments; assume for this issue that you have solely been asked to document whether the conditions in ASC 330-10-35-16(b) are met.

Answer 1

MEMORANDUM

To : Kelly Corp

From: Plant Accountant

Date: 04/ 08/2018

Subject: Stating inventory of Bauxite at selling price as per criterial specified in Accounting Standard Codification (ASC) 330-10-35-16 (b)

The issue of stating the inventory of Bauxite at selling price is based on the following assumptions provided viz.,

a. Quoted market prices are available for Bauxite; and that

b. There exists an active market for Bauxite.

It is generally recognized that inventories have to be stated at cost. As per ASC 330-10-35-2, " the cost basis of recording inventory achieves the objective of properly matching costs with revenues". However, according to ASC 330-10-35-15, in exceptional circumstances it will be possible to state inventories above their cost, e.g., inability to determine appropriate costs, immediate marketability at quoted price, and unit interchangeability.

ASC 330-10-35-16 states that "income accrues only at the time of sale, and gains should not be anticipated by stating assets at their current sale prices".

ASC 330-10-35-16 provides that "exceptions for stating assets at their selling prices are permissible for the following: viz.,

a. Inventories of Gold and Silver, when there is an effective government controlled market at a fixed monetary value; and

b. Inventories of agricultural, mineral and other products with all of the following criteria, viz.,

i. Units of such inventories are interchangeable;

ii. Units of inventory have an immediate marketability at quoted prices; and

iii. Units of inventory for which costs may be diificult to obtain".

Therefore, the given assumptions regarding existence of active market for Bauxite and availability of quoted prices are directly met by only one condition as stated in ASC 330-10-35-16 (b) (ii) as stated above.

To enable Kelly Corp to states its inventory of Bauxite at selling price, it is necessary for it to meet all conditions or criteria specified in ASC 330-10-35-16 (b). Therefore, it is necessary for Kelly Corp to include and validate the following assumptions, viz.,

i) Units of Bauxite inventory are interchangeable; and

ii) It is difficult to obtain appropriate costs for the inventory of Bauxite.

If all conditions specified in ASC 330-10-35-16 (b) are met by including the additional assumptions mentioned above then Kelly Corp can state the inventory of bauxite at selling price (or above cost).

Kelly Corp should, as per ASC 330-10-35-16, "reduce the inventory by expenditures to be incurred in disposal".

A full disclosure for the inventory of Bauxite is now mandatory as it recorded at above cost.