11.20.2017

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Practical Questions on Accounting Standard 2 : Valuation of Inventory


Practical Questions on Accounting Standard 2 : Valuation of Inventory






 1.      The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the time of closing of its account for the year 2002-03. The Historical Cost and Net Realizable Value of the items of closing stock are determined as follows:
as2,as-2,inventory valuation,accounting standard 2


What will be the value of Closing Stock?

Answer:

As per para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the lower of cost and net realizable value. Inventories should be written down to net realizable value on an item-by-item basis in the given case.
as2,as-2,inventory valuation,accounting standard 2






 

Hence, closing stock will be valued at Rs. 76 lakhs.

2.      X Co. Limited purchased goods at the cost of Rs.40 lakhs in October, 2005. Till March, 2006, 75% of the stocks were sold. The company wants to disclose closing stock at Rs.10 lakhs. The expected sale value is Rs.11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing stock to be disclosed as at 31.3.2006.

Answer:

As per Para 5 of Accounting Standard 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost and net realizable value.

In this case, the cost of inventory is Rs. 10 lakhs. The net realizable value is 11,00,000 × 90% = Rs. 9,90,000. So, the stock should be valued at Rs. 9,90,000.

3.      Items that are to be excluded in determination of the cost of inventories as per AS2.

Answer:

Items that are to be excluded in determination of the cost of inventories as per para 13 of AS 2 on ‘Valuation of Inventories’ are:

·         Abnormal amounts of wasted materials, labour or other production costs.

·         Storage costs unless those costs are necessary in the production process prior to a further
·         Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and

·         Selling and distribution costs.

4.      Sony Pharma ordered 12,000 kg. of certain material at Rs.80 per unit. The purchase price includes excise duty Rs. 4 per kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to Rs. 77,400. Normal transit loss is 3%. The company actually received 11,600 kg. and consumed 10,100 kg. of material. Compute cost of inventory under AS 2 and abnormal loss.



Answer:
under AS 2 and abnormal loss.



Value of closing stock under AS 2 = (11,600 kgs. – 10,100 kgs.) × Rs. 85 = Rs.1, 27,500 Abnormal loss = (11,640 kgs. – 11,600 kgs.) × Rs.85 = Rs.3,400



5.      Raw materials inventory of a company includes certain material purchased at Rs.100 per kg. The price of the material is on decline and replacement cost of the inventory at the year end is Rs.75 per kg. It is possible to convert the material into finished product at conversion cost of Rs.125. Decide whether to make the product or not to make the product, if selling price is

(i)   Rs.175 and

(ii)   Rs.225 *Also find out the value of inventory in each case.

Answer:

As per para 24 of Accounting Standard 2 ‘Valuation of Inventories’, materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realizable value.

 i.            When selling price is Rs.175
 Incremental Profit = Rs.175 – Rs.125
= Rs.50
Current price of the material = Rs.75
Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. Rs. 75 because the selling price of the finished product is less than Rs.225 (100+125) per kg.

ii.             When selling price is Rs.225

Incremental Profit = Rs.225 – Rs.125 = Rs.100

Current price of the raw material = Rs.75.

Therefore, it is better to make the product.

Raw material inventory would be valued at Rs.100 per kg because the selling price of the finished product is not less than Rs.225.

6.      HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when

the books are closed at the end of each month. At the end of month following information is available:

Sales
Rs.
47,25,000
General overheads cost
Rs.
1,25,000
Inventory at beginning

1,00,000 litres @ 15 per litre
Purchases



June 1 two lakh litres @ 14.25

June 30 one lakh litres @ 15.15

Closing inventory 1.30 lakh litres

Compute the following by the FIFO as per AS 2:

i.            Value of Inventory on June, 30.

ii.             Amount of cost of goods sold for June.

iii.             Profit/Loss for the month of June.

Answer : 
(i) Cost of closing inventory for 1,30,000 litres as on 30th





June


15,15,000

1,00,000 litres @ Rs.15.15

4,27,500






30,000 litres @ Rs. 14.25

19,42,500


Total





(ii) Calculation of cost of goods sold

15,00,000

Opening inventories (1,00,000 litres @ Rs. 15)

28,50,000

Purchases
June-1 (2,00,000 litres @ Rs.14.25)

15,15,000








June-30 (1,00,000 litres @ Rs.15.15)

58,65,000




(19,42,500)

Less: Closing inventories

39,22,500

Cost of goods sold





(iii) Calculation of profit

47,25,000






Sales (Given) (A)

39,22,500

Cost of goods sold

1,25,000





Add: General overheads

40,47,500

Total cost (B)



6,77,500

Profit (A-B)