Blog: Mgt401 Assignment Solution

Question No. 1 You are required to identify with brief reasons at which value the inventory will be recognized in each case according to IAS-2? 

Part (a) Materials bought at cost of Rs.15 000 for further processing and assembling in order to fulfill a profitable special order. It is observed that cost price has fallen to Rs.12000 since buying these items. Answer: According to IAS 2, the inventory will be recognized on net realizable value (expected selling price which is 12000- selling cost if any- further completion cost) because the selling price of this asset is declined from 15000 to 12000. According to IAS 2, the cost of an item is not recoverable if the selling price of an inventory declines, and we will show these inventories on net realizable value. We will have to estimate the net realizable value NRV of inventory in each accounting period. When these circumstances will no longer exist (the expected selling price of this inventory will increase, we will reverse the net realizable value and the new carrying amount will be the lower of the cost or net realizable value. This means, if cost is less than the NRV of an asset, we will show the inventory on cost and if the NRV of the inventory is less than the cost, we will show the inventory on NRV. 

Part (b) Company ABC constructed a machine for a customer on a special order on a contract Price of Rs.20, 000. The order has recently been completed by the company at a cost of Rs.19, 200. It has now been identified that an extra conversion cost of Rs.3, 000 will be required in order to meet certain regulations. It is duly accepted by both parties that they will meet equally the extra cost of conversion. Answer: Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale. In this problem, Expected selling price of the inventory is 20000 Further conversion cost RS 3000 is required to complete in order to meet certain regulations. But the point here is that both parties will meet equally the extra cost of conversion, we will divide (3000/2= 1500 because both parties will equally meet the extra cost of conversion) and 1500 will be charged to company ABC and this we will subtract this amount from the expected selling price to calculate NRV. So net realizable value: 20000-1500=18500 And cost incurred to date is 19200. So we will show this inventory on net realizable value (18500) because according to IAS 2, inventories are valued at lower of the cost or net realizable value. Here, net realizable value is less than the cost of the inventory. So we will show this inventory on net realizable value. 

Question No. 2Haleeb Foods, a renowned name in dairy farming industry in Pakistan has incurred the following expenditure during the current year. You are required to identify how these costs should be treated in the financial statements of Haleeb Foods according to IAS-38? 

Part (a) Rs.175, 000 spent on the design of a new product and it is assumed that this new design will require the next three years period to be developed and ready for tested with a view to production in four years' time. Answer: According to IAS38, costs spend on the design are development cost; we will capitalize these costs and will right off against sale in the profit and loss account. After deducting cost from sale, we gets gross profit from which further we deduct other expenses and taxes and gets net profit or net loss. 

Part (b) Rs.650, 000 incurred on the testing of a new production system which designed by the company itself and start to operate during the following accounting period. By using this new system it is predicted that there will be a cut off in cost of production by 20%.