IAS 2 – INVENTORY

PRACTICAL QUESTIONS

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Question 1

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a) Explain the term inventories as defined by IAS 2
b) List the cost which should be included when measuring the cost of inventories and identify
cost to be excluded

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c) Explain the term Net realizable value
d) Identify circumstances in which a cost formula may be used to establish the cost of inventories

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QUESTION 2 BABATUNDE LIMITED

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Babatunde Ltd inventory at the end of an accounting period included the finished products with the
following cost;

Purchae Price of materials

less 5% trade discount
FE
=N=
9,000
450
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8,550
import duty at 10% 855
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Direct labour cost 5,850

Allocation of fixed production overheads 2,840
Storage cost since product completed 225
Advertising cost 317
Total Cost 18,637
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NOTES
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i. all of these costs exclude VAT. The company is able to recover any VAT which it is charged by its
supplier but cannot recover import duties
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ii. One third of the materials included above were wasted as the result of an abnormal machine
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malfunction
iii. Fixed Production overheads are allocated to products on the assumption that production is
running at normal capacity. In fact, production was unusually low during the period in which this
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product was made and a further allocation of =N=820 would be required if fixed overheads were
allocated on the basis of actual production

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 iv. The advertising cost were incurred whilst trying to find a buyer for the product. No buyer had
been found by the end of the accounting period.
Required:

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Calculate the cost the inventory (Product) in accordance with the requirement of IAS 2

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Question 3 KELLERSTONE

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Kellerstone buys used machines which it reconditions and sell on to customers. The company’s inventory
at the end of its most recent accounting period included the following machines;

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Purchase Reconditioning Expected further expected

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Price cost incurred to costs before selling price

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date sales
'=N= '=N= '=N= '=N=
Machine W 10,300 650 - 12,500
Machine X
Machine Y
Machine Z
15,750
18,450
8,300
850
500
FE
400
2,100
900
17,500
23,000
9,500
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52,800 2,000 3,400 62,500
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Selling Expenses are expected to absorb 4% of the expected selling price

Required ;
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A) Explain why it is not permissible to value the inventory of machines at their total purchase price
of =N=52,800 or at the total selling price of =N=62,500
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B) Compute the value at which the inventory of machines should be measured in the financial
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statement
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QUESTION 4 PALLY
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Pally Ltd is a manufacturing company. The company’s inventory at 30 June 2020 include the following
items of work in progress;
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 Product X Product Y
Number of Units held at 30 June 2020 6,400 3,800
Cost incurred per unit to date =N=8 =N=12
Estimated further cost per unit to completion =N=7 =N=8

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Estimated selling price cost per unit =N=2 =N=4
Estimated selling price per unit =N=15 =N=30

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The company complies with IAS2 Inventories.

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Required;

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a) Define the term inventories

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b) Explain how cost of inventory should be determined
c) Define the term net realizable value
d) Explain how inventories should b measured in accordance with IAS 2

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e) Calculate the figure at which the work in progress of Pally Ltd should be shown in the company
financial statement for the year 30 June ,2020
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QUESTION 5 TEDDY
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Teddy & co has 500 items of product in inventory at 31 October 2018. These items are no longer saleable
in their current condition. However, they can be adjusted for a cost of =N2.50 per item. Once adjusted,
the items can be sold at their normal price of =N=5.30 each. The original cost of the items was =N=2.25
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each. The replacement cost of the item at 31 October 2018 is =N=2.45 each.
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Required.
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Demonstrate by calculation the amount that the entity should measure inventory at 31 October 2018
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QUESTION 6 BAMBAM
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The following relates to BAMBAM Plc for the period ended 31st March, 2015.

Inventory Type Cost (=N=) Selling Price(=N=) Selling Cost (=N=)

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A 500,000 800,000 300,000

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 B 600,000 950,000 400,000

C 700,000 880,000 100,000

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D 800,000 920,000 200,000

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E 840,000 970,000 95,000

Required:

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Determine the value of inventory as at 31st of March, 2015.

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Question 7 FOLARIN

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The following relates to Folarin Plc for the year ended 31 Dec, 2018

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A B C D E

Cost per unit (=N=)

Selling Price per unit (=N=) FE 70

100
80

120
90

140
100

160
110

180
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Marketing cost per unit (=N=) 20 25 30 35 40
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Other cost to enable sales (=N=) 10 5 25 15 50

Units of inventory held 5units 6units 7units 8units 10units

Determine the value of inventory for inclusion in the Financial statement as at 31st of March, 2015
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Question 8 CHUKUMA
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Chukuma buys goods from an overseas supplier. It has recently taken delivery of 1,000 units of
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Spare Part. the quoted price of Spare Parts was $1,200 per unit but Chukuma has negotiated a trade
discount of 5% due to the size of the order. The supplier also offers an earlier settlement discount
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of 2% for payment within 30 days and Chukuma intends to achieve this. Import duties of $60 per
unit must be paid before the goods are released through custom. One of the goods are released
through customs, Chukuma must pay a delivery cost of $5,000 to have the Spare Parts taken to its
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warehouse.
Required
Determine the cost of the inventory for Chukuma upon initial recognition
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Question 9 HAIR TERMOCOOL

Thermocool manufactures air conditioning systems. The following information is relevant:

Each Air-condition unit requires the following:

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 1 component Compressor at a cost of =N=1,205 each
1 component condenser at a cost of =N=800 each
Sundry other raw materials at a cost of =N=150
The company faces the following monthly expenses:

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Factory rent =N=16,500
Energy cost =N=7,500

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Selling and administrative costs =N=10,000
Each Air-condition unit takes two hours to assemble. Production workers are paid =N=300 per
hour. Production overheads are absorbed into units of production using an hourly rate. The normal
level of production per month is 1,000 hours.

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Required
Determine the cost of each Air-condition unit

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QUESTION

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OLAMIDE
The following were information in relation to inventories of Olamide Ltd :

Purchases

April 3 120 units at N30 each

June 5 200 units at N40 each
FE =N=
3,600
8,000
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Aug 8 310 units at N60 each 18,600
630 30,200
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sales
June 6 230 units at N65 14,950
July 20 80 units at N66 5,280
Oct 9 300 units at N75 22,500
610 42,730
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Required
a. Determine the value of closing inventory using
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i) FIFO
ii) AVERAGE
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iii) Calculate the total sales and total Purchases

iv) What is the Gross Profit?
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Question 11

Password plc held inventories in store which are not identical items valued at cost of ₦1,250,000, within this amount
is an item of inventory of ₦200,000 which is damaged. The damaged inventory can be sold in its current condition
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for ₦79,000, or it could be rectified at a cost to password of ₦25,500. Its selling price would then be ₦120,000. Selling
cost would be ₦5,200 if it is sold in its current condition since a specific buyer can be found. However, password
believes that selling cost would be ₦3,100 if it was rectified.

Required: Determine the value of inventory to be reported in the financial statements.