Impairment of inventory

Question 1

Are assets measured on the SOFP at the value of their expected economic benefits (EB’s)?

Answer 1

Not usually (trade receivables is an exception)

Question 2

Can an asset be measured at an amount below the value of the expected EB’s?

Answer 2

Yes!

Question 3

Can it be measured at an amount above those EB’s?

Answer 3

No, because of prudence

Question 4

What happens if an asset has a carrying amount above the expected EB’s?

Answer 4

It must be impaired/written down to no more than the value of expected benefits

Question 5

How can we value the expected economic benefits?

Answer 5

It depends on the asset category

Question 6

What happens to inventory that has been lost, stollen or perished?

Answer 6

It must be de-recognised i.e removed from the ledger

Question 7

What happens to inventory that has been damaged?

Answer 7

The carrying amount is reduced to NRV- net realisable value

Question 8

What is NRV (Net realisable value)?

Answer 8

Estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs to make the sale

Question 9

What is the journal entry for both types of inventory impairment?

Answer 9

DR Cost of Sales expense (P/L)
      CR Inventory (A)