ExpertMedium2 marksMultiple Choice
ACCA · Question 12 · Recording Transactions and Events
A fashion retail company has 1,000 winter coats in inventory at year-end. The coats cost $50 each to manufacture. Due to an unseasonably warm winter, the expected selling price has dropped to $45 each. The company pays a 10% sales commission on all sales. What is the total value of this inventory in the Statement of Financial Position?
A fashion retail company has 1,000 winter coats in inventory at year-end. The coats cost $50 each to manufacture. Due to an unseasonably warm winter, the expected selling price has dropped to $45 each. The company pays a 10% sales commission on all sales. What is the total value of this inventory in the Statement of Financial Position?
Answer options:
A.
$50,000
B.
$45,000
C.
$40,500
D.
$40,000
How to approach this question
Calculate Cost. Calculate NRV (Estimated Selling Price - Estimated Costs to Sell). Compare the two and pick the lower figure. Multiply by the quantity.
Full Answer
C.$40,500✓ Correct
IAS 2 requires inventory to be measured at the lower of cost and Net Realizable Value (NRV). Cost = $50. NRV = Estimated selling price ($45) - Estimated costs to sell (10% of $45 = $4.50) = $40.50. Since NRV ($40.50) is lower than cost ($50), the inventory is valued at $40.50 per unit. Total value = 1,000 units × $40.50 = $40,500.
Common mistakes
Forgetting to deduct the sales commission when calculating NRV, leading to option B.
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