Chapter 12: Lower of Cost and Net Realizable Value

Question 1

T/F

Under IFRS, inventories shall be measured at the lower of cost and net realizable value.

Answer 1

True

Question 2

Is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost of disposal.

Answer 2

Net Realizable Value

Question 3

T/F

The cost of inventories may not be recoverable when the inventories are damaged or have become obsolete.

Answer 3

True

Question 4

T/F

Inventories are usually written down to net realizable value on an item by item or individual basis.

Answer 4

True

Question 5

T/F

If the cost is lower than NRV, the inventory is measured at cost and the increase in value is not recognized.

Answer 5

True

Question 6

T/F

If net realizable value is lower than the cost, the decrease in value is not recognized.

Answer 6

False

Question 7

2 Method of accounting for the Inventory writedown

Answer 7

1.) Direct Method / COGS method
2. Allowance Method / loss method

Question 8

In Direct method, Inventory is recorded at the ___________________

Answer 8

LCNRV

Question 9

T/F

In Direct Method, any loss on inventory writedown is accounted for separately but not “buried” in the COGS.

Answer 9

False

Question 10

In Allowance Method, the inventory is recorded at ________ and any loss of inventory is accounted for separately.

Answer 10

Cost

Question 11

The Journal Entries for Direct Method

Answer 11

Inventory
Income Summary

Question 12

The Journal Entries for Allowance Method

Answer 12

Inventory
Income Summary

Question 13

The Journal Entries when the allowance for inventory writedown is presented as a deduction from the inventory.

Answer 13

Loss on Inventory Writedown
Allowance for inventory writedown

Question 14

The Journal Entries when the decrease in the allowance is a reversal of the previous inventory and recorded as gain on reversal of writedown.

Answer 14

Allowance for inventory writedown
Gain on reversal of inventory writedown

Question 15

Are obligations of the entity to acquire certain goods sometime in the future at a fixed price and fixed quantity.

Answer 15

Purchase Commitments

Question 16

T/F

Any losses which are expected to arise from the firm and noncancelable commitments shall not be recognized.

Answer 16

True

Question 17

T/F

If there is a decline in purchase price after a purchase commitment has been made, a loss is recorded in the period of the price decline.

Answer 17

True

Question 18

Are those who buy and sell commodities for others or on their own account.

Answer 18

Broker-trades

Question 19

Commodities of broker-traders are measured at _______________.

Answer 19

Fair value less cost of disposal

Question 20

Inventories of agricultural, forest and mineral products are measured at ________ at certain stages of production.

Answer 20

NRV