Question

Writing a Brief Issues Memo, Inventory 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 sell-

ing 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

As described in ASC 3330-10-53-16(b), income accrues only at rhe time of sale, and that gains may not be anticipated by recording assests at their current sales price. This simply means recording should not be done at current market value in case of inventories. However following are few exceptions:
a). Gold and silver inventory, when there is an effective government- controlled market at a fixed monetory value.
b). Inventories with representing agricultral, mineral and other products with the following criteria:
I) units of which are interchangeable
II) units of which have an immediate marketability at qouted prices
III) units for which appropriate costs may be difficult to obtain.

with the given assumtion that qouted market prices are available for bauxite(mineral) and that he market for bauxite is active, bauxite inventory can be recored at above cost that is at its selling price, provided all the above criteria is met ie. inventory units are interchangeable, it is easy to find the qouted prices and appropriate costs may be difficul to obtain.
The assumptions identified for evaluation are- the market for bauxite is active and qouted market prices are generally available.

As bauxite will be recorded at market price ie. at its current market price, adjustments will be made for expenditures to be incurred in its disposal.