Question

A company’s normal selling price for its product is $26 per unit. However, due to market competition, the selling price has fallen to $21 per unit. This company's current inventory consists of 140 units purchased at $22 per unit. Replacement cost has fallen to $19 per unit. Calculate the value of this company's inventory at the lower of cost or market.

Answer 1

$2,940

Step-by-step explanation:

The accounting standard for Inventory under IFRS IAS 2 requires that inventory be recognized at cost.

Subsequently, inventory is to be carried at the lower of cost or net realizable value.

The cost per unit in this situation is $22 while the net realizable value which is the amount that can be realized from the sale of this item of inventoy per unit is $21.

The ending inventory is the product of the realizable value per unit and the number of units held

= $21 * 140

= $2,940

Answer 2

The value of inventory is $2,660

Step-by-step explanation:

The lower of cost or market value is supported by international accounting framework such as the U.S GAAP so as to avoid a situation where inventory is stated at an amount beyond what can be reasonably recovered from disposing of the inventory.

Specifically, the reduced selling price is lower than the cost ,hence the reduced selling price is compared to replacement cost.

All in all, replacement is also lower than the reduced selling price per unit, as a result the inventory should be valued at replacement cost

Inventory=140*$19=$2,660