Financial Statements Help

lifeisstrange

Hi everyone,

I am currently studying financial statement and I have a problem with an exercise inside Kaplan revision kit regarding closing inventory.
Could you please help me with the following question:
"The inventories at the close of business were valued at cost of £19871. Included in this balance was a inventory line costing £4000 that, due to change in legislation, is now illegal. The company could rectify the items at a cost of £2500 and plans to do so. The items usually retail to customers at £6000."

My answer was £19871-£4000+£2500=18371
Kaplan answer : £19871-500w/off=19371

Could you explain me how to arrive to Kaplan answer?

Thanks

emuratty

Hi, hopefully I can explain this.

You need to value your inventory at the lower of COST and NET REALISABLE VALUE.

Initially the inventory has been included in the closing inventory at its COST of £4,000.

The NRV is calculated by taking the selling price and deducting any costs incurred in making them saleable, in this example the selling price is £6,000 and cost of making them saleable is £2,500 - giving a NRV of £3,500.

So, the cost in the closing inventory needs to be the lower of the two figures above, i.e. £3,500, however it has been included at £4,000, so you need to adjust it by deducting £500 (or you could deduct £4000 and then add £3,500).