Question

Telma Ltd. is a public company incorporated in Alberta and traded on the Toronto Stock Exchange. In December 20X6, Telma management decided that cost exceeded NRV for a significant portion of the inventory. Consequently, the company wrote the Class A inventory down from $350,000 to $150,000 and the Class B inventory down from $425,000 to $325,000.

In June 20X7, the value of Class B inventory rose to $365,000. Half of the Class B was sold for $190,000 in November of that year.

In March 20X8, the Class A inventory was sold in bulk for a price of €100,000. At the time of the sale, €1 = Cdn$1.70. The buyer paid Telma’s invoice one month later, when €1 = Cdn$1.62.

 

Required:

1. Prepare all entries, assuming that the direct write-down method is used for lower of cost or NRV.

2. Prepare all entries, assuming instead that the allowance method is used for lower of cost or NRV.

Answer 1

Requirement 1 x Direct writedown

 

December 20X6:

            Holding loss on inventory (COS)......................................           300,000

                     Inventory, Class A..............................................                               200,000

                     Inventory, Class B...............................................                              100,000

 

June 20X7:

            Inventory Class B..............................................................             40,000

                     Recovery of holding loss (COS).........................                                40,000

 

November 20X7:

            Accounts receivable..........................................................           190,000

            Cost of goods sold............................................................           182,500

                     Sales revenue......................................................                             190,000

                     Inventory Class B..............................................                               182,500

 

March 20X8:

            Accounts receivable (€100,000 × C$1.70)........................         170,000

            Cost of goods sold ...........................................................           150,000

                     Sales revenue......................................................                             170,000

                     Inventory, Class A..............................................                               150,000

 

April 20X8:

            Cash (€100,000 × C$1.62)................................................           162,000

            Foreign currency loss [€100,000 × (1.70 – 1.62)].............            8,000

                     Accounts receivable.............................................                             170,000

 

Requirement 2 X Allowance method

 

December 20X6:

            Holding loss on inventory (COS)......................................           300,000

                     Allowance to reduce inventory to NRV..................                           300,000

 

June 20X7:                                                                                                  

            Allowance to reduce inventory to NRV ..........................             40,000

                     Recovery of holding loss (COS).............................                            40,000

November 20X7:

            Accounts receivable..........................................................         190,000

            Cost of goods sold............................................................          182,500

            Allowance to reduce inventory to NRV ..........................           30,000

                     Sales revenue.........................................................                          190,000

                     Inventory, Class B....................................................                         212,500

 

March 20X8:

            Accounts receivable (€100,000 × C$1.70)........................        170,000

            Cost of goods sold ...........................................................          150,000

            Allowance to reduce inventory to NRV...........................         200,000

                     Sales revenue............................................................                       170,000

                     Inventory, Class A...................................................                          350,000

 

April 20X8:

            Cash (€100,000 × C$1.62)................................................         162,000

            Foreign currency loss [€100,000 × (1.70 – 1.62)].............           8,000

                     Accounts receivable.................................................                         170,000