What changes should be made to the following inventory under IAS 2 - ProProfs Discuss

# 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: \$12,000Replacement cost: \$ 7,000 Expected selling price: \$ 9,000 Expected selling costÂ : \$ 500Normal 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.

This question is part of rakap
Asked by Rakap, Last updated: Feb 10, 2020

#### Christian Jackson

Christian Jackson, Content Developer, Austin

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

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

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