Answer:
1. $16,350
2. Debit Inventory writeoff (p/l) $1,650
Credit Inventory $1,650
3. This adjustment will reduce the value of the total assets by $1,650. The total expense will also increase by the same amount thus reducing the net income.
Explanation:
According to IAS 2 inventories which is the accounting standard for Inventories under IFRS, Inventory should initially be recognized at the cost (which includes the cost of the item and other associated cost such as freight).
However, it is required that subsequently, inventory would be measured at the lower of cost or net realizable value. When the cost is higher than the net realizable value, the cost of the inventory will be written down by
Debit Inventory write-off (p/l)
Credit Inventory
Inventory Quantity Cost NRV New Amount
Shirts 35 $60 $70 $60
Mega Driver 15 $360 $250 $250
Mega Driver II 30 $350 $420 $350
Of all the items , only Mega driver has a cost higher than NRV and the adjustment required amounts to
= (360 - 250) * 15
= $1,650
Ending inventory using the lower of cost and net realizable value.
= (35 * 60) + (15 * 250) + (30 * 350)
= $16,350
Adjustment required
Debit Inventory writeoff (p/l) $1,650
Credit Inventory $1,650
This adjustment will reduce the value of the total assets by $1,650. The total expense will also increase by the same amount thus reducing the net income.
