IAS-2 Inventories

Q No.1:

Arham (Private) Limited started business on July 1, 2014. They are engaged in sales of
engineering components, which are imported in the country.
Assume following rates were applicable on invoice value at the time of import as per the
Federal budget:

Custom Duty 20%

Income Tax 6%
Sales tax 18%
Normal Sales tax 15%

Additional sales tax @ 3% is also charged on imports, which is neither refundable nor adjustable
while sales tax and income tax are refundable/ adjustable.
After negotiations with a number of suppliers the company was finally able to strike a deal with
a foreign company and received first lot on January 1, 2015. By
January 31, 2015, 12,500 units were still in stock as a result of following imports:
January 1, 2015:
The company imported 10,000 units at an invoice price of Rs. 100 per unit and in addition to
payment of customs duty; income tax and sales tax, following costs were also incurred at the
time of imports:

Rs/ Unit

Carriage 2.00
Clearing Charges to agent 1.00
other related inventory costs allowed under IAS 2 for inclusion 9.00

January 15, 2015:

The company received another lot of 5,000 units of raw material. The supplier allowed volume
rebate and reduced invoice value by Rs. 10 per unit. The rates of Government levies are same but
a recent hike in prices has resulted the increase in clearing charges to Rs. 2 per unit and other
costs to Rs. 10.

January 20, 2015:

The company received another lot of 5,000 units of raw material. The supplier allowed further
volume rebate and reduced invoice value to Rs. 80 per unit while no more changes in other
expenses.
The Store In-charge is keeping accurate quantitative records of the inventory however, due to
limited accounting knowledge he is unaware as to inventory valuation and believes that fair
market value should be assigned to the inventory for valuation.

Required:
Assume you have been appointed as a Management Accountant in Arham (Private) Limited and
the management ask you to calculate the value of inventory as at January 31, 2015 using first in
first out (FIFO) method so that the company’s staff can follow same principles for subsequent
periods.

Q No.2:

Qasim International has imported goods during the year. The following expenses are related to
these goods:

Invoice amount 200,000

Import duty and other non-adjustable taxes 65,000
Transportation charges 12,000
Labour handling charges 5,000

The Company has acquired a warehouse on rent to store the imported goods until they are sold
out. The rent is Rs 60,000 per annum. The estimated selling expenses are Rs 15,000.

The selling of the imported goods is Rs 340,000. Due to rain in the city the goods were affected.
The net realizable value of the goods is assessed to be Rs 275,000.

Required:

a) Calculate the landed cost of the goods.

b) Show at what amount the inventories will be shown in the statement of Financial Position
in accordance with IAS 2.
 QNo.3:

AFP & Co, has inventory on hand at the end of the year on December 31, 2011 as follows:

Material Production Selling Cost/ Selling Price/

Item Units Cost/unit Cost/ Unit Unit (Rs.) Unit (Rs.)
(Rs.) (Rs.)
Suit Cases 450 165 18 14 184
Hand Bags 330 55 15 12 85

Required:

State at what amount the inventories will be shown in the financial statements as per the
requirements of IAS-2

Q No.4: Khewra manufacturing was formed on 1 January 2015. The entity manufactures and
sells a single product and values it on a first-in, first-out basis. One ton of raw material is
processed into one ton of finished goods.

The following details relate to 2015:

Purchases of raw materials

Purchases: 1,000 tons of Raw material per week

Rs.100,000 per ton on January 1, increasing to Rs. 150,000 per ton
Price:
on 1 July
Import Duties: Rs. 10,000 per ton

Transport from docks to factory Rs. 20,000 per ton

Production costs

Production capacity 1,500 tons per week

Variable costs Rs. 25,000 per ton

Fixed costs Rs. 30,000,000 per week

Sales details
Selling price Rs. 240,000 per ton

Delivery costs to customers Rs. 8,000 per ton

Selling cost Rs. 4,000 per ton

Inventories at 31 December 2015

Raw material 2,000 tons

Finished goods 2,000 tons

There is a ready market for new materials and the NRV of the raw materials is higher than its
cost.

Required:
Calculate and disclose the value of inventories at 31 December 2015 in accordance with IAS 2.

Q No. 5: NKL Enterprises produces a single product. On July 31, 2015, the finished goods
inventory consisted of 4,000 units valued at Rs. 220 per unit and the inventory of raw materials
was worth Rs. 540,000. For the month of August 2015, the books of account show the following:

Rupees
Raw material purchases 845,000

Direct Labor 735,000

Selling costs 248,000

Depreciation on plant and machinery 80,000

Distribution cost 89,560

Factory manager’s salary 47,600

Indirect labor 148,000

Indirect material consumed 45,000

Other production overheads 84,000

Other accounting costs 60,540

Other administration overheads 168,600

Other Information:

a) 8,000 units of finished goods were produced during August 2015.

b) The value of raw materials in August 31, 2015 amounted to Rs. 600,000.
c) There was no work-in-progress at the start of the month. However, on August 31, the
value of work-in-progress is approximately Rs. 250,000.
d) 5,000 units of finished goods were available in inventory as on August 31, 2015.
Required: Compute the value of closing inventory of finished goods as on August 31, 2015
based on weighted average cost method.

Q No. 6: Cambridge Garments Industries carries out a business of readymade garments

through large shops in the major cities of Pakistan. Its inventory ledger account balance at
December 31, 2015 under the perpetual inventory system, was Rs. 73,410,000. The physical
count revealed that the cost of inventory on hand was Rs. 71,400,000 only. Its owner Mr. Kaizer
expected a small inventory shortfall due to damage and petty theft, but considered this shortfall
to be excessive.

On January 5, 2016, Kaizer carried out an investigation and discovered the following:

1) Goods costing Rs. 300,000 were invoiced to Ebrahim Limited for Rs. 425,000 on
December 29, 2015 on FOB basis. The goods were actually dispatched to the customer
on January 2, 2016.
2) Included in the physical count were goods worth Rs. 200,000 which were held on behalf
of a third party.
3) Goods costing Rs. 410,000 purchased on credit from Mustafa & Co. were received on
December 28, 2015 and included in the physical count. However, the purchase had not
been recorded.
4) On December 23, 2015 goods costing Rs. 400,000 were purchased on credit from Mubina
Supplies, Faisalabad. The purchase was recorded on December 27, 2015 i.e. when the
goods were lifted by the transport company appointed by Mr. Kaizer, from the warehouse
of Mubina Supplies. The goods arrived on January 3, 2016.
5) List of inventory at a shop situated in Sialkot had been under cast by Rs. 90,000.
6) On December 25, 2015 goods costing Rs. 310,000 were sold on credit to Skims
Industries for Rs. 500,000. The goods were shipped on December 28, 2015 and were
received by the customer on January 2, 2016.
7) Goods costing Rs. 2,500,000 had been returned to Ali Garments on December 30, 2015.
A credit note was received from the supplier on January 5, 2016 and entered in the books
in January 2016. No payment had been made for the goods prior to their return.
8) Goods sold to a customer Mr. Saleem were recorded in inventory ledger account at the
sale price of Rs. 780,000. The goods were recorded at cost plus 30%.
 Required:

a) Reconcile the ledger balance with a physical record to determine the shortage (if any).
b) Determine the value of inventory that should be recorded in the statements of financial
position.
c) Prepare the adjusting entries that should be recorded in the books of Fashion Blue
Enterprise, in December 2015.

Q No. 7: The most important principal of IAS 2 – Inventories, is that the inventories be
measured at the lower of their cost and their net realizable value. AL-Hummus Company
manufactures plastic water tanks for the farming industry. On June 30, 2018, its closing
inventory consisted of 950 kg of plastic resin raw material and also to 250 finished units (plastic
water tanks). The other details are as follows:
Plastic

The purchase price of plastic resin was Rs. 45 per kg throughout the year to June 30, 2018,
delivery costs of an additional Rs. 7.50 per kg. Al-Hummus company has a policy of always
keeping plenty of plastic resin in inventory, as its supply can be unreliable. Close to the year-end,
the price of plastic resin collapses due to market over supply. The purchase price of Al-Hummus
Company’s raw material is now Rs. 31.50 per kg and a cost of Rs. 7.50 per kg delivery charge.
The existing inventory of plastic resin can be sold in the market for a Rs. 27 per kg net of all
costs.

Tanks

Each tank requires 10 kg of plastic to manufacture and each unit incurs Rs. 375 in conversion
cost (labour and overhead). Al-Hummus Company sells the tanks for Rs. 1500 per tank. It is
expected that the price will drop to Rs. 1,350 per tank as a result of fall in the market price of
plastic resin. The selling and distribution of Rs. 90 per unit is incurred on completed units by Al-
Hummus Company.

Required:

Calculate the value of closing inventory in the books of Al-Hummus Company as at June 30,
2018 applying principles of IAS 2 – Inventories.

Q No. 8: Mr. Shahwez, Inventory Manager of Al-Ghazi Poultry Limited, has received a
number of queries in relation to IAS-2 ~ inventories by the General Manager, The company has
three types of inventories with following relevant costs and net realizable value (NRV).

Types of inventories Cost NRV

Table eggs 234,000 260,000
Day old chicks 182,000 156,000
 Chickens 299,000 312,000
715,000 728,000

Required:

In the context of IAS-2, Mr. Shahwez, Inventory Manager has been asked to answer the
following questions:
a) Calculate total value of closing inventory of Al-Ghazi Poultry (Pvt.) Limited as at June
30, 2019.
b) Briefly discuss the situation in which net realizable value (NRV) is likely to be less than
the cost of inventory.

Q No. 9: Al-Hikmat Limited’s closing inventory before adjustments, as at June 30, 2019 is Rs.
1,130,482, which includes Rs. 150,800 for the items accidently destroyed on June 30, 2019.
After the count was completed, It also includes Rs. 96,850, which relates to the cost of an
inventory damaged in April 2019 and can be reprocessed, at a cost of Rs. 22,090, and then can be
sold for Rs. 78,330.

Required:
Calculate the value of closing inventory of Al-Hikmat Limited as at June 30, 2019.