Inventory

Question 1

Lower of cost and Net Realizable Value

Answer 1

Choosing between the lower of cost or the net realizable value when reporting for the unsold inventory.

At the end of the year, we want to report the value for inventory.

Compare between the cost of inventory and the net realizable value.

Net realizable value refers to the estimated selling price of the inventory.

Hence, at the end of the financial year, if the cost is $200 and the NRV is $300, we will report the inventory to be at $200. And if the cost is $200 and the NRV is $150, we will report the inventory to be at $150.

When we use cost, there will not be any year-end adjustments needed.

When we use NRV, we will need to reduce inventory from cost to net realizable value. This difference in value will be recorded under the COGS account.

Writing down of inventory not only reduces the total assets, but also reduces the net income and retained earnings.

Question 2

What are the subsequent measurement models for PPE?

Answer 2

1. Cost Model
2. Revaluation Model

• The accounting treatments for initial acquisition and subsequent cost incurred are the same for both the cost model and the revaluation model.

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Question 3

Cost model

Answer 3

PPE carried at cost is valued at:

(Initial cost at acquisition + subsequent cost incurred) - accumulated depreciation - subsequent impairment

Both depreciation and impairment loss are contra asset accounts.

Recording Depreciation:
We will debit the depreciation, which is the profit or loss account, and credit accumulated depreciation to record the increase in accumulated depreciation, which will decrease the asset value on the statement of financial position

Recording Impairment Loss:
We will debit the impairment, which is the profit or loss account, and credit accumulated impairment to record the increase in accumulated impairment which, which will decrease the asset value on the statement of financial position.

New carrying amount = Cost - Accumulated Impairment - Accumulated Depreciation.

Subsequent depreciation will be based on the new carrying amount.

Question 4

Revaluation model

Answer 4

PPE carried at a revalued amount is the:

Fair value at date of revaluation - subsequent accumulated depreciation - subsequent impairment

• We can only use revaluation model for the subsequent measurement of PPE only if the fair value can be measured reliably.
• If an entity has chosen the revaluation model for subsequent measurement of the PPE, an item of PPE shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent impairment loss.

Revalued amount/Carrying amount - Fair Value (at revaluation date) - subsequent accumulated depreciation - subsequent impairment.

• Unlike lower of cost and NRV rule for inventory, revaluation for PPE can either increase or decrease the carrying amount of PPE.
• Accounting treatments for the initial revaluation and subsequent revaluation might be different.

Initial Recognition!!

• Upon initial revaluation, the assets carrying amount can increase or decrease.
• If the assets carrying amount is increase as a result of revaluation, the increase should be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus.
• For recording purposes, we debit the PPE to record the increased amount of the asset and credit the revaluation reserve to record the increase in equity.
• On the other hand if an assets carrying among decreases as a result of revaluation the decrease shall be recognized in profit or loss.
• For recording purposes, we credit the PPE to record the decrease amount of the asset and debit a profit or loss account which is the loss of revaluation to record the increase in expense.

Subsequent Recognition!!
- For subsequent revaluation we will check the comprehensive income balance. If the current revaluation increases the carrying amount of PPE and the comprehensive income is zero, then we will record and increase in other comprehensive income under revaluation reserve. If the current revaluation decreases carrying amount of PPE and there is no amount in the comprehensive income, then we will record a loss in our profit or loss statement.

Question 5

What happens when PPE is disposed under cost model?

Answer 5

When PPE is disposed under cost model, the entity needs to:

1. Remove all records related to PPE. This includes Cost, Accumulated depreciation and accumulated impairment.
2. Record the net proceeds from the disposal.
3. Account for gain or loss which is the difference between the net proceeds and carrying amount of PPE.