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- 20 Marks
FA – May 2019 – L1 – Q6 – Inventory
Advise on the valuation of inventory under IAS 2, including calculation of closing inventory value, and identification of excluded costs.
Question
a) Mr. Alex Azugu, the managing director of Tojo Ltd, has a number of specific queries in relation to Inventory and has asked you for advice in relation to IAS 2: Inventories. As part of its overall inventory, Tojo Ltd has three items of inventories whose costs and Net Realisable Values (NRV) are as follows:
| Inventory Items | Item Cost (GH¢) | NRV (GH¢) |
|---|---|---|
| 1 | 72 | 80 |
| 2 | 56 | 48 |
| 3 | 92 | 96 |
| Total | 220 | 224 |
Required:
i) The closing value of each item of inventory and hence the total value of closing inventory for these items for Tojo Ltd at the year-end. (2 marks)
ii) The items that comprise inventory. (2 marks)
iii) THREE (3) examples of costs which are specifically excluded from the costs of inventories and instead are recognized as expenses in the period in which they are incurred. (3 marks)
iv) THREE (3) situations in which net realizable value is likely to be less than cost. (3 marks)
b) Davis Ltd’s closing inventory as at 31 December 2018 is GH¢347,841. This includes GH¢4,640 for items accidentally destroyed on 31 December 2018 after the count was completed. Also included is GH¢2,980 which relates to the cost of inventory damaged in October 2018, which can be reworked at a cost of GH¢680 and then sold for GH¢2,410.
Required:
Calculate the closing value of inventory at the year-end. (4 marks)
c) Danqua Ltd is in the process of finalizing its financial statements for the year ended 31 March 2019. The draft statements were completed on 14 April 2019, and the audit is currently in progress. The financial statements are expected to be approved by the board of directors on 15 May 2019 and published on 20 May 2019. The following matters have come to light during the audit, and your advice is requested. No adjustment has yet been made for any of the following:
i) Closing inventory at 31 March 2019 includes 100 items carried at cost GH¢5,000 each. New safety regulations were announced on 5 April 2019 with immediate effect. The items of inventory do not comply with these regulations. As a result, the net realizable value of the inventory is only GH¢4,500 each.
ii) An investment in unquoted equity instruments was held by Danqua Ltd at 31 March 2019 at an amount of GH¢3.5 million. This was its fair value on 30 September 2018, the most recent reporting date. Due to the unavailability of professional valuers, an updated fair value was not available until 15 April 2019. On this date, the valuer provided an estimated fair value of GH¢2.8 million.
Required:
In each case (i) to (ii) above, prepare a briefing note advising on the accounting treatment and/or disclosures required as a result of the event(s) after the reporting date. (6 marks)
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- 20 Marks
FA – May 2019 – L1 – Q6 – Inventory
Advise on the valuation of inventory under IAS 2, including calculation of closing inventory value, and identification of excluded costs.
Question
a) Mr. Alex Azugu, the managing director of Tojo Ltd, has a number of specific queries in relation to Inventory and has asked you for advice in relation to IAS 2: Inventories. As part of its overall inventory, Tojo Ltd has three items of inventories whose costs and Net Realisable Values (NRV) are as follows:
| Inventory Items | Item Cost (GH¢) | NRV (GH¢) |
|---|---|---|
| 1 | 72 | 80 |
| 2 | 56 | 48 |
| 3 | 92 | 96 |
| Total | 220 | 224 |
Required:
i) The closing value of each item of inventory and hence the total value of closing inventory for these items for Tojo Ltd at the year-end. (2 marks)
ii) The items that comprise inventory. (2 marks)
iii) THREE (3) examples of costs which are specifically excluded from the costs of inventories and instead are recognized as expenses in the period in which they are incurred. (3 marks)
iv) THREE (3) situations in which net realizable value is likely to be less than cost. (3 marks)
b) Davis Ltd’s closing inventory as at 31 December 2018 is GH¢347,841. This includes GH¢4,640 for items accidentally destroyed on 31 December 2018 after the count was completed. Also included is GH¢2,980 which relates to the cost of inventory damaged in October 2018, which can be reworked at a cost of GH¢680 and then sold for GH¢2,410.
Required:
Calculate the closing value of inventory at the year-end. (4 marks)
c) Danqua Ltd is in the process of finalizing its financial statements for the year ended 31 March 2019. The draft statements were completed on 14 April 2019, and the audit is currently in progress. The financial statements are expected to be approved by the board of directors on 15 May 2019 and published on 20 May 2019. The following matters have come to light during the audit, and your advice is requested. No adjustment has yet been made for any of the following:
i) Closing inventory at 31 March 2019 includes 100 items carried at cost GH¢5,000 each. New safety regulations were announced on 5 April 2019 with immediate effect. The items of inventory do not comply with these regulations. As a result, the net realizable value of the inventory is only GH¢4,500 each.
ii) An investment in unquoted equity instruments was held by Danqua Ltd at 31 March 2019 at an amount of GH¢3.5 million. This was its fair value on 30 September 2018, the most recent reporting date. Due to the unavailability of professional valuers, an updated fair value was not available until 15 April 2019. On this date, the valuer provided an estimated fair value of GH¢2.8 million.
Required:
In each case (i) to (ii) above, prepare a briefing note advising on the accounting treatment and/or disclosures required as a result of the event(s) after the reporting date. (6 marks)
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