Answer to Question #171606 in Accounting for John

Question

LGM Ltd has 200 items of a product Zeros in inventory at 31 March 2021. The items were found to be damaged. The items can be repaired and repackaged for a cost of £1.00 per item. Once repackaged, the items can be sold at the normal price of £3.00 each. The original cost of the items was £1.90 each. The replacement cost at 31 March 2021 is £2.25 each.

 

What value should LGM put in inventory of Zeros in its statement of financial position at 31 March 2021?          

Answer 1

Solution:

Closing inventory is normally valued at the lower of cost price and market price (replacement cost) as per the conservatism principle.

The total cost of product Zeros = original cost + cost of repair and packaging

 = £1.90 + £1 = £2.90

Market price (replacement cost) = £2.25

Therefore, the value of the market price (replacement), which is lower, should be put in the inventory of Zeros in its statement of financial position as of 31^st March 2021.