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BUSI 353 S18 Assignment 4 SOLUTION

This document discusses inventory accounting and impairment under ASPE and IFRS. It provides an example calculation of net realizable value for different inventory items and the resulting impairment amounts recorded on an item-by-item versus total inventory basis. It also addresses the differences between ASPE and IFRS regarding the optional capitalization of interest costs for inventory. The key differences are that IFRS requires interest capitalization for inventory requiring substantial time to ready, while ASPE only allows it as an accounting policy choice.

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229 views2 pages

BUSI 353 S18 Assignment 4 SOLUTION

This document discusses inventory accounting and impairment under ASPE and IFRS. It provides an example calculation of net realizable value for different inventory items and the resulting impairment amounts recorded on an item-by-item versus total inventory basis. It also addresses the differences between ASPE and IFRS regarding the optional capitalization of interest costs for inventory. The key differences are that IFRS requires interest capitalization for inventory requiring substantial time to ready, while ASPE only allows it as an accounting policy choice.

Uploaded by

Tan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BUSI 353

SOLUTION ASSIGNMENT #4

With respect to inventory accounting, ASPE and IFRS are virtually identical. One
exception arises with interest capitalization. See Solution #2, Requirement 1 (below)

Solution 1
Requirement 1 and 2

Net realizable value:


Item 1 2 3 Total basis
(a) Estimated cost to rebuild 15 6 110
(b) Estimated sales price 42 28 180
(c) Estimated cost to sell 4 3 15
Net realizable value (b-a-c) $23 $19 $55

Volume 300 units 500 units 100 units


Total NRV $6,900 $9,500 $5,500 $21,900

Cost (per unit) $ 53 $ 17 $250


Volume 300 units 500 units 100 units
Cost ($55 x 500, etc.) $15,900 $8,500 $25,000 $49,400
$27,500
Impairment (item by item basis) 9,000 0 19,500

Requirement 3
Item 1
Loss on impairment of inventory (damaged 9,000
inventory) ...............................................................
Allowance to reduce Inventory to NRV............ 9,000

Item 2
No entry required.

Item 3
Loss on impairment of inventory (damaged 19,500
inventory) ...............................................................
Allowance to reduce Inventory to NRV............ 19,500

Requirement 4
See above table (right-hand side). The impairment on a “total inventory” basis would be
$27,500. Notice how this is less than the impairment loss recorded in requirement 3
(“item-by-item” basis), which totals $28,500. The “item-by-item” basis is more
conservative and is the method required by the ASPE and IFRS (with rare exception).

Requirement 5
 Because using a “total inventory” basis yields the smallest impairment loss.
 Because managers argue that the entire inventory can be expected to be
ultimately sold and the net result of all sales should be considered, not just
individual items.

1
Solution 2

Requirement 1

Cost of goods available for sale:


Beginning inventory $150,000
Net purchases [$470,000*(98%)] 460,600
Freight-in 44,000
Insurance coverage on freight 9,000
Customs duty 8,000
Cost of goods available for sale (COGAS) 671,600

Net sales revenue ($615,000 - $13,000) .... $602,000


Estimated cost of goods sold (74%=100%-26%) x .74 445,480
Estimated closing inventory.......................... $226,120
Loss before tax ($226,120 x 0.16) ................ ($36,179)
Income Tax recovery (43%) 15,557
Net loss ........................................................ ($20,622)

Interest expense on the purchased inventory is irrelevant because such cost is not
permitted to be capitalized to the cost of inventory. Also, the interest expense is not
considered in the determination of gross margin (i.e. not part of COGS, not part of net
sales revenue). It should be noted that ASPE section 3031 does permit (but does not
require) interest to be capitalized as discussed below (emphasis added):

3031.17A -- The cost of inventories that require a substantial period of time to get
them ready for their intended use or sale includes interest costs when the
enterprise's accounting policy is to capitalize interest costs. The cost of inventories
that are ready for their intended use or sale when acquired does not include
interest costs.

Under IFRS, the cost of inventories that are ready for their intended use or sale when
acquired does not include interest costs. This is identical to ASPE. However, under
IFRS, the cost of inventories that require a substantial period of time to get them ready
for their intended use or sale must include interest costs (some rare exceptions).
Under ASPE, this is an accounting policy choice.

Requirement 2

The amount of net loss arising from the fire would be the same as under ASPE =
$20,622.

None of this amount would be “other comprehensive income”. This is not an item of
OCI.

Note:
Under ASPE (Part II of the Handbook), OCI is not used.

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