Chapter 8 - Inventory

Question 1

Inventory Criteria

Answer 1

1. Controlled by the purchaser
   a) Seller has right to payment
   b) Legal title and possession
2. Intended for resale or use within company’s normal operations

Question 2

Initial Recognition of Inventory

Answer 2

Initially measured at cost
including:
- Purchase price
- All other direct costs

Excluding:
- Storage costs (unless necessary for aging like cheese and wine)
- Overhead costs

Question 3

Subsequent Measurement

Answer 3

Measured at lower of:
1. Cost
2. NRV (FV less costs to sell)

Question 4

How to account for borrowing costs for inventory

Answer 4

Interest costs must be capitalized when:

• Is for a qualifying asset which takes “substantial amount of time to complete”

If the asset is a special inventory which is measured at FV:
- Choice to capitalize or expense

Question 5

Initial cost measurement for Servicing and construction contracts

Answer 5

Initial cost includes:

• Fulfilment costs (direct materials, direct labour, manufacturing overhead)
• Costs incurred to attain the contract (example a flight ticket to put in a bid)

All subsequent measurement is at lower of cost and NRV still

Question 6

Cost of Manufacturing company inventory types

Answer 6

1. Raw materials - purchase cost
2. Work in Progress - Includes direct materials, direct labour, and allocated MOH
3. Finished goods - Includes direct materials, direct labour, and allocated MOH

All subsequent measurement is at lower of cost and NRV still

Question 7

Onerous contract criteria and how to record

Answer 7

Record loss and provision if:
1. Contract not subject to revision or cancellation
2. Loss likely and material
3. Loss can be reasonably estimated

How to record:
Set up a provision and record a loss to the PnL for the expected loss

ASPE: The term onerous contract does not exist but the same recognition principle is applied

Question 8

Methods for Estimating Inventory

Answer 8

Gross Margin Method:

Steps:
1. Estimate gross margin rate
2. Calculate COGAS = Beg. Inv. + Purchases
3. Estimate gross margin = Sales x GM Rate
4. Estimate COGS = Net sales - GM
5. Estimate ending inventory = COGAS - COGS

Retail Method:

Steps:
1. Determine COGAS at cost and at retail
2. Calculate cost to retail ratio (COGAS C / COGAS R)
3. Subtract sales from retail value of goods to get ending inventory at retail
4. Ending inventory at retail * cost to retail ratio = ending inventory at cost

Question 9

Biological asset IFRS

Answer 9

Definition: Living animal or plant

Initial Recognition:
- Measure at FV less costs to sell if available ; other wise, cost

Entry: A pig is born with vet costs of $20. Pig has a FV of $100

DR Biological Asset $100
CR Gain on biological asset $80
CR Cash $20

Subsequent Measurement:
- Measure at FV less costs to sell
- Changes in value –> Gain / Loss
- Any related costs incurred are Expensed

Question 10

Agricultural Produce IFRS

Answer 10

Definition: The “harvested product of a biological asset”

Initial recognition:
- At the time of harvest, FV less costs to sell

Entry: Pig is slaughtered to sell at FV less costs to sell of $200. Assume biological asset’s FV less cost to sell was last assessed at $150

DR Inventory - Agr. Pro. $200
CR Biological assets. $150
CR Gain on Recogn. $50

Subsequent Measurement:
- Lower of cost and NRV
- If the agricultural produce is processed further into other products, the associated costs are capitalized to inventory on books
Example: pig slaughtered and then made into bacon for extra $40. The $40 gets added to inventory cost

Question 11

Productive Biological Assets ASPE

Answer 11

Definition: A living plant or animal held for productive use and not intended for resale

Initial recognition:
- At cost
- All costs to develop the asset into being productive are capitalized (fertilizer, feeding)
- Once productive, costs from then on are expensed

Subsequent measurement:
If limited life –> Amortize
If indefinite life –> No amortization, test annually for impairment

Question 12

Agricultural inventories (ASPE)

Answer 12

Definition: Living plant or animal intended for resale and not for productive use

Initial recognition:
- Choice of cost model or NRV

Subsequent measurement cost model:
- Valued at lower of cost and NRV

Subsequent measurement at NRV:
- Recognized at NRV
- When sold, the carrying amount is expensed and gain/loss to PnL