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Chapter 5

Q. 5.7

Balance sheet valuation of inventories.
Considering the case of Top Printer S.R.L., the wholesaler in Exercise 5 (Sect. 5.2.2), and assuming that the company’s managers decide that FIFO is the cost assigning model which best fits to valuating X300 printers, determine the value of these printers to be disclosed in the statement of financial position as of December 31st, 20X8, knowing that the X300 printer reaches a net realisable value of 1450 lei/unit at the financial year end of 20X8 (based on the assumption that there are no other transactions related to merchandise). Journalise the corresponding accounting entry.


Verified Solution

As shown in Exercise 5, there is a disclosure of a closing inventory for X300 printers after applying FIFO of 10 units at the unit cost of 1600 lei/unit, leading to a total amount of 16,000 lei.
For the Balance Sheet valuation of its inventories, the company will compare the cost of the X300 printers remaining in inventory to their net realisable value, as follows:

Cost = 10 units × 1600 lei/unit = 16,000 lei
Net realisable value = 10 units × 1450 lei/unit = 14,500 lei
Therefore, the value which will be disclosed in the Statement of
Financial Position of Top Printer S.R.L. is the lowest value between cost and net realisable value (NRV):
Min (Cost; Net Realisable Value) = min (16,000 lei; 14,500 lei) = 14,500 lei

Hence, the entity has to record an impairment adjustment (write-down) in the amount of: 16,000 lei − 14,500 lei = 1500 lei.

A write-down in a company’s inventory is recorded by reducing the amount reported by the asset account (IFRS approach) or by recognising an increase of a contra inventory account (the approach of Romanian accounting regulations). The debit in the entry to record an impairment adjustment of an inventory is an expense account which affects the company’s income statement.
Therefore, the accounting entry to be recorded is the following:

  • under Romanian accounting regulations:

1500 lei         Expenses with the impairment of current assets       =        Accumulated impairment of merchandise            1500 lei


  • according to IFRS:

1500 lei          Expenses with the Write-down of Inventories      =              Merchandise            1500 lei


When the financial statements are prepared, merchandise will be disclosed at its net value in the Balance Sheet, an amount determined as the difference between its cost and the recorded impairment adjustment, as follows:
Net value of merchandise December 31st, 20X8 = Debit Ending Balance of Merchandise − Credit Ending Balance of Accumulated Impairment of Merchandise = 16,000 lei − 1500 lei = 14,500 lei (NRV).