Question

16. This is a continuation of problem 15. At December 31, Year 2, Beech Corporation still had the same three different products in its inventory. The following table provides updated information for the company's products: Replacement Product Cost 101 Cost $130 $160 $100 202 303 $180 $150 $100 Selling Price $190 $160 $130 Beech Corporation still expects to incur selling costs equal to 5 percent of the selling price. Required: Determine the amount at which Beech should report its inventory on the December 31. Year 2, balance sheet. How would your answer above differ if Beech used U.S. GAAP rather than IFRS?

Answer 1

a. Amount at which Beech should report its inventory on the December 31, Year 2 Balance sheet is as follows :

As per IFRS, inventory is valued at lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Hence applying the above logic as per IFRS, value of inventory is computed as below :

S. No.	Product	Cost ($)	Net Realizable Value (S.P - 5% commission on S.P) ($)	Inventory Value (Lower of Cost or NRV) ($)
1	101	130	180.5	130
2	202	160	152	152
3	303	100	123.5	100

b. Answer to a. part using US GAAP :

As per US GAAP, inventory is valued at lower of cost or market value. Market value has been defined under US GAAP as the current replacement cost as limited by net realizable value.

So ideally, as per the above stated concept we have to first calculate the market value which is lower of : a) Replacement cost; or b) Net realizable value & then we have to compare the market value to the cost. Whichever of the two is lower is the value of the inventory to be reported in our balance sheet.

As per the above concepts the value of inventory has been computed as below :

			Calculation of Market Value : Lower of replacement cost or Net realizable value
S. No.	Product	Cost ($)	Net Realizable Value (S.P - 5% commission on S.P) ($)	Current Replacement Cost ($)	Market Value ($)	Inventory Value (Lower of Cost or Market Value) ($)
1	101	130	180.5	180	180	130
2	202	160	152	150	150	150
3	303	100	123.5	100	100	100