Mgt401 Assignment Solution

Question No. 1 You are required to identify with brief reasons at which value the inventory will be recognized in each case according to IAS-2?
Part (a) Materials bought at cost of Rs.15 000 for further processing and assembling in order to fulfill a profitable special order. It is observed that cost price has fallen to Rs.12000 since buying these items. Answer: According to IAS 2, the inventory will be recognized on net realizable value (expected selling price which is 12000- selling cost if any- further completion cost) because the selling price of this asset is declined from 15000 to 12000. According to IAS 2, the cost of an item is not recoverable if the selling price of an inventory declines, and we will show these inventories on net realizable value. We will have to estimate the net realizable value NRV of inventory in each accounting period. When these circumstances will no longer exist (the expected selling price of this inventory will increase



Part (b)
Expected selling price of the inventory is 20000 Further conversion cost RS 3000 is required to complete in order to meet certain regulations. But the point here is that both parties will meet equally the extra cost of conversion, we will divide (3000/2= 1500 because both parties will equally meet the extra cost of conversion) and 1500 will be charged to company ABC and this we will subtract this amount from the expected selling price to calculate NRV. So net realizable value: 20000-1500=18500 And cost incurred to date is 19200. So we will show this inventory on net realizable value (18500) because according to IAS 2, inventories are valued at lower of the cost or net realizable value. Here, net realizable value is less than the cost of the inventory. So we will show this inventory on net realizable value.