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What changes should be made to the following inventory under IAS 2 after the expected selling price increases to $13,000 and other stats remain the same?
Historical cost: $12,000
Replacement cost: $ 7,000
Expected selling price: $ 9,000
Expected selling cost : $ 500
Normal profit margin: 10% of price.



A. Inventory should be increased (debited) by $3,500.
B. Inventory should be increased (debited) by $4,000.
C. No adjustment should be made to inventory once it is written down.
D. Inventory should be increased (debited) by $1,000.

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Asked by Rakap, Last updated: Feb 10, 2020

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2 Answers

Christian Jackson

Christian Jackson, Content Developer, Austin

Answered Aug 07, 2018

The previous answer says that the entire inventory should be increased, or debited, by $3,500. However, it almost makes more sense to debit the entire inventory by $4,000, since that is the amount that the expected selling price has changed. So, what gives? There are a couple of things that are going on here. The first is that debiting the inventory by $4,000 doesn’t take into account the expected selling cost, but debiting by $3,500 does.

It’s a $500 cost that could cut into profits if it exceeds that. Debiting by $3,500 gives some wiggle room. Furthermore, it is expected that the sale will bring in a profit of at least $1,300, or ten percent of the cost. To keep that up, it makes sense to debit the inventory almost as much as the selling price increased.

 

John Smith

John Smith

Answered Sep 23, 2016

Inventory should be increased (debited) by $3,500.

Doupnik - Chapter 04 #8 Learning Objective: 1 Level: Medium
 

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