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 costÂ : $ 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.
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.