Question

A company like Golf USA that sells golf-related inventory typically will have inventory items such as golf clothing and golf equipment. As technology advances the design and performance of the next generation of drivers, the older models become less marketable and therefore decline in value. Suppose that in the current year, Ping (a manufacturer of golf clubs) introduces the Mega Driver II, the new and improved version of the Mega Driver. Below are amounts related to Golf USA's inventory at the end of the year.
Inventory Quantity Cost NRV
Shirts 35 $60 $70
Mega Driver 15 360 250
Mega Driver II 30 350 420
Required:

1. Calculate ending inventory using the lower of cost and net realizable value.

2. Record any necessary adjustment to inventory.

3. Explain the impact of the adjustment in the financial statements.

Answer 1

Answer:

1. $16,350

2. Debit Inventory writeoff (p/l)   $1,650

   Credit Inventory                       $1,650

3. This adjustment will reduce the value of the total assets by $1,650. The total expense will also increase by the same amount thus reducing the net income.

Explanation:

According to IAS 2 inventories which is the accounting standard for Inventories under IFRS, Inventory should initially be recognized at the cost (which includes the cost of the item and other associated cost such as freight).

However, it is required that subsequently, inventory would be measured at the lower of cost or net realizable value. When the cost is higher than the net realizable value, the cost of the inventory will be written down by

Debit Inventory write-off (p/l)

Credit Inventory

Inventory                 Quantity        Cost            NRV        New Amount

Shirts                            35              $60            $70              $60

Mega Driver                 15               $360          $250           $250

Mega Driver II              30              $350           $420          $350

Of all the items , only Mega driver has a cost higher than NRV and the adjustment required amounts to

= (360 - 250) * 15

= $1,650

Ending inventory using the lower of cost and net realizable value.

= (35 * 60) + (15 * 250) + (30 * 350)

= $16,350

Adjustment required

Debit Inventory writeoff (p/l)   $1,650

Credit Inventory                       $1,650

This adjustment will reduce the value of the total assets by $1,650. The total expense will also increase by the same amount thus reducing the net income.