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Solution Manual for Intermediate Accounting 1st edition Gordon
Solution Manual for Intermediate Accounting 1st edition Gordon,
Raedy & Sannella
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CHAPTER 10
Short-Term Operating Assets—
Inventory
Cases
Judgment Case 1: The Choice to Use LIFO
a. The LIFO reserve for Kroger as of February 1, 2014, and February 2, 2013, is $1,150
million and $1,098 million, respectively. Unlike many companies, Kroger presents this
directly on the face of their balance sheet.
b. If Kroger did not use LIFO, their inventory would be reported at $6,801 million
instead of $5,651 million ($6,801 FIFO inventory less $1,150 LIFO reserve). The
LIFO reserve results in a 16.9% decrease in the inventory balance ($1,150/$6,801).
Current assets are decreased by 11.5% {$1,150/($8,830+$1,150)}. Total assets are
decreased by 3.8% {$1,150/($29,281+$1,150)}.
c. The LIFO effect is measured as the increase in the balance in the LIFO reserve
account. Thus, the LIFO effect is $52 million ($1,150 million less $1,098 million).
d. If Kroger had not used LIFO, their earnings before income taxes would have been
$52 million higher, or $2,334 million ($2,282 plus $52 LIFO effect). Thus, the impact
on earnings before taxes is to decrease earnings by 2.2% ($52/$2,334).
e. Assuming a tax rate of 35%, Kroger would have paid $18.2 million additional taxes
for the year ended February 1, 2014 ($52 million LIFO effect x 35% tax rate). This
would be a 2.6% increase {$18.2/($679 taxes paid + $18.2 impact of LIFO}. Judgment Case 2: Inventory Costing
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Solution Manual for Intermediate Accounting 1st edition Gordon
1. The judgment issue in this scenario is whether the reduced production in 20X4 is
abnormally low as discussed in paragraphs 3 through 6 of ASC 330-10-30. If the
production in that year is judged as abnormally low then it will not be used to
compute normal production. If it is not judged to be abnormally low, then it is used in
the computation of normal production. There is not one correct answer. Also, as
indicated in paragraph 6, the actual level of production may be used if it approximates
normal capacity. Thus, there are three possible answers as follows:
Scenario
Assume
production in
20X4 is
abnormally low
Assume that
production in
20X4 is normal
Use production
in 20X7
approximates
normal capacity
Fixed production costs
Normal capacity
Fixed production costs
allocated to inventory per
unit (fixed production
costs divided by normal
capacity)
Fixed costs allocated to
inventory (fixed
production costs times
units produced in the
current year)
Fixed costs expensed
immediately (Fixed
production costs less fixed
costs allocated to
inventory)
$2,000,000
9,900,000*
20.20202 cents
per baseball
$1,919,192
$80,808
$2,000,000
9,740,000**
20.53388 cents
per baseball
$1,950,719
$49,281
$2,000,000
9,500,000***
21.05263 cents
$2,000,000
$0
*Computed using an average of 20X2, 20X3, 20X5 and 20X6.
**Computed using an average of 20X2 through 20X6.
*** Computed using current year production.
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Solution Manual for Intermediate Accounting 1st edition Gordon
Judgment Case 3: Lower-of-Cost-or-Market
This is a case that demonstrates that the selling price used to calculate NRV, and thus
the lower-of-cost-or-market is not always easy to determine. There are four possible
scenarios for KR Automotives. Due to different assumptions about future selling prices,
the write down could range from $0 to $4,500 per car.
Scenario
Cost
Replace-
ment
Cost
Selling
Price
Selling
Cost
NRV
NRV less a
normal
profit
margin
Market
Value
Write Down per
Car (Cost less
market value, if
lower)
Keep on
lot
$23,000
$20,000
$25,500
$500
$25,000
$21,175
$21,175
$1,825
Sell
overseas
23,000
20,000
19,000
500
18,500
15,650
18,500
4,500
Sell to
used car
lot
23,000
20,000
20,400
500
19,900
16,840
19,900
3,100
Sell at
auction
23,000
20,000
34,000
500
33,500
28,400
28,400
0
There is no right answer to this case. Students could pick one of the four values
presented in the table above for the per-car write down. Or, they could choose some
sort of blended rate. For example, they could assume that KR would sell the 20 cars to
the overseas dealer but sell the remaining cars on their lot.
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Solution Manual for Intermediate Accounting 1st edition Gordon
Financial Statement Analysis: Solution to Case 1:
a. From Note 1, we know that Kimberly-Clark applies the lower of cost or market
where the LIFO cost-flow assumption is used for its U.S. inventories. For inventories
outside of the U.S., Kimberly-Clark also values these at the lower of cost or market
but uses either the FIFO or moving average cost-flow assumptions.
b. The LIFO reserve, called the Adjustment to LIFO, at the end of 2013, 2012 and
2011 is $242, $231 and $280 million, respectively.
c. The amount of inventory before the LIFO reserve is the FIFO inventory of $2,475,
$2,579 and $2,636 million at the end of 2013, 2012 and 2011, respectively.
d. We can use a t-account for the LIFO reserve to determine the difference in cost of
goods sold under LIFO and FIFO as follows:
LIFO Reserve
December 31, 2011 Year-end adjustment
??
280 ??
December 31, 2012 Year-end adjustment
??
231 ??
December 31, 2013
242
The LIFO reserve decreases by $49 million in 2012 and the cost of goods sold under
FIFO would increase by $49 million. The LIFO reserve increases by $11 million in 2013 and the cost of goods sold under
FIFO would decrease by $11 million.
(in millions) 2012 2013
LIFO cost of goods sold
$14,314
$13,912 ←from income statement
(Increase)/decrease in LIFO reserve
49
(11)
FIFO cost of goods sold
14,363
$13,901
e. In 2012, FIFO cost of goods sold ($14,363 million) is higher than LIFO cost of goods
sold, indicating gross profit, taxes and net income would have been lower under
FIFO.
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Solution Manual for Intermediate Accounting 1st edition Gordon
In 2013, the FIFO cost of goods sold ($13,901 million) is lower than LIFO cost of
goods sold, indicating gross profit, taxes and net income would have been higher
under FIFO.
f. Under LIFO and FIFO, the gross profit and gross profit percentage are as follows:
2012 2013
(in millions) LIFO FIFO LIFO FIFO
Net Sales $21,063 $21,063 $21,152 $21,152
Cost of Sales 14,314 14,363 13,912 13,901
Gross Profit $ 6,749 $ 6,700 $ 7,240 $ 7,251
Gross Profit Percentage 32.0% 31.8% 34.2% 34.3%
In 2012, under FIFO, the gross profit and gross profit percentage are lower due to
the decrease in the LIFO reserve which increased the cost of goods sold under
FIFO.
In 2013, under FIFO, the gross profit and gross profit percentage are higher due to
the increase in the LIFO reserve which decreased the cost of goods sold under
FIFO.
In 2012, under LIFO Kimberly-Clark’s inventory turnover would be 6.09, higher than
the 5.51 under FIFO. Even though the cost of goods sold is higher under FIFO, the
lower LIFO average inventory leads to higher LIFO inventory turnover. The days
inventory on hand under LIFO would be only 59.9 compared to 66.2 under FIFO.
In 2013, the inventory turnover decreased slightly under both LIFO and FIFO. The
days inventory on hand increased slightly under both LIFO and FIFO. Both
indicators remain more favorable under LIFO.
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Solution Manual for Intermediate Accounting 1st edition Gordon
Indicator
2012
LIFO FIFO
Inventory Turnover =
Cost of Goods Sold Ratio Average Inventory
6.09 = $14, 314 $2, 352
5.51 = $14, 363 $2, 608
Beginning Inventory
Average =
+ Ending Inventory
Inventory 2
($2, 356 + $2, 348) $2, 352 =
2
($2, 636 + $2, 579 ) $2, 608 =
2
Days Inventory =
365
On Hand Inventory Turnover Ratio 59.9 =
365 6.09
66.2 = 365 5.51
Indicator
2013
LIFO
FIFO
Inventory Turnover =
Cost of Goods Sold Ratio Average Inventory
6.07 = $13, 912 $2, 291
5.50 = $13, 901 $2, 527
Beginning Inventory
Average =
+ Ending Inventory
Inventory 2
($2, 348 + $2, 233) $2, 291 =
2
($2, 579 + $2, 475) $2, 527 =
2
Days Inventory =
365
On Hand Inventory Turnover Ratio 60.1 =
365 6.07
66.4 = 365 5.50
g. From Note 1, Procter & Gamble primarily reports inventories at the lower of cost or
market value using the FIFO cost-flow assumption. Procter & Gamble states that
minor amounts of product inventories, including certain cosmetics and
commodities, are maintained using LIFO. Procter & Gamble does not disclose any
LIFO reserves, indicating that the difference between FIFO and LIFO inventories
must also be minor.
h. When converting Kimberly-Clark to FIFO, Kimberly-Clark’s inventory turnover ratio
is lower than Procter & Gamble’s. When converting Kimberly-Clark to FIFO,
Kimberly-Clark’s days inventory on hand is about eight days greater than Procter &
Gamble’s. Using FIFO as the comparison point, both Procter & Gamble’s higher
inventory turnover ratio and lower days inventory on hand appear more favorable
than Kimberly-Clark’s.
Kimberly-Clark Procter & Gamble
Indicator FIFO FIFO
Inventory Turnover =
Cost of Goods Sold Ratio Average Inventory
5.50 6.23 = $42, 428 $6, 815
Beginning Inventory
Average =
+ Ending Inventory
Inventory 2
($6, 721+ $6, 909) $6, 815 =
2
Days Inventory =
365
On Hand Inventory Turnover Ratio
66.4 58.6 = 365 6.23
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Solution Manual for Intermediate Accounting 1st edition Gordon
Solution to Case 2:
a. Note 6 on Merchandise Inventories indicates that Foot Locker uses the LIFO cost-
flow assumption for about 61% of its inventory and the FIFO cost-flow assumption
for the remaining 39%.
Cost Flow
Assumption 2013(in millions) Percent
LIFO $746 61%
FIFO $474 39%
$1,220
b. LIFO is allowed in the United States and usually has tax benefits, so Foot Locker
uses the LIFO cost-flow assumption in the United States. IFRS does not allow LIFO.
If Foot Locker has branches or subsidiaries in countries that use IFRS and have local
financial reporting requirements requiring the use of IFRS, Foot Locker would use
FIFO for those international operations.
c. From note 1, the Summary of Significant Accounting Policies, Foot Locker explains
its use of the retail inventory method:
Under the retail inventory method, cost is determined by applying a cost-to-retail
percentage across groupings of similar items, known as departments. The cost-to-
retail percentage is applied to ending inventory at its current owned retail valuation
to determine the cost of ending inventory on a department basis. The Company
provides reserves based on current selling prices when the inventory has not been
marked down to market.
d. From note 1, the Summary of Significant Accounting Policies, Foot Locker explains
that its cost of sales includes “the cost of merchandise, occupancy, buyers’
compensation, and shipping and handling costs.”
e. In note 6 on Merchandise Inventories, Foot Locker explains that the LIFO value of
inventory approximates its FIFO value. That is, the values of inventory measured
under LIFO versus FIFO are not materially different, giving Foot Locker a LIFO
reserve of zero.
f. Using Sales and Cost of Sales from the income statement, we compute Foot
Locker’s Gross Profit and Gross Profit Percentage as follows:
(in millions) 2013 2012 2011
Sales $6,505 $6,182 $5,623
Cost of Sales 4,372 4,148 3,827
Gross Profit $2,133 $2,034 $1,796
Gross Profit Percentage 32.8% 32.9% 31.9%
From 2011 to 2013, the gross profit percentage increased about 0.9%, indicating
that Foot Locker is able to generate approximately 0.9 cents more on each dollar of
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1 Adapted from the Ernst & Young Academic Resource Center with permission of the Ernst & Young
Foundation. Copyright 2011. All rights reserved.
© 2016 Pearson Education, Inc. © 2016 Pearson Education, Inc.
Solution Manual for Intermediate Accounting 1st edition Gordon
sales in 2013 than it was in 2011. This increase in gross profit can be used to cover
other expenses or returned to the shareholders.
g. Foot Locker’s inventory turnover was 3.66 times a year and the days inventory on
hand was about 99.7, implying that every 99.7 days new inventory was added to
the stores as old inventory was sold.
Inventory Turnover =
Cost of Goods Sold Ratio Average Inventory
3.66 = $4, 372 $1,194
Beginning Inventory
Average =
+ Ending Inventory
Inventory 2
($1,167 + $1, 220) $1,194 =
2
Days Inventory =
365
On Hand Inventory Turnover Ratio 99.7 =
365 3.66
Surfing the Standards Case 1: Inventory in the Agriculture Industry1
MEMORANDUM TO THE FILE TO: Client File – Tarheel Farm, Inc.
FROM: Student Name
DATE: Assignment Date RE: Allocation of Costs Related to Inventory
FACTS
Tarheel Farm, Inc. (TFI) is a North Carolina corporation involved in agricultural
production and has an October 31 fiscal year-end. It is not publicly traded, but it is
required to prepare annual financial statements for its bank. The bank has required that
these statements comply with U.S. GAAP. TFI typically produces four products: beef
cattle, corn, winter wheat, and sugar beets. All four of these products have a life cycle
of less than one year. The remaining relevant facts can be summarized in the following
table.
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1 Adapted from the Ernst & Young Academic Resource Center with permission of the Ernst & Young
Foundation. Copyright 2011. All rights reserved.
© 2016 Pearson Education, Inc. © 2016 Pearson Education, Inc.
Solution Manual for Intermediate Accounting 1st edition Gordon
Crop
Development
finished?
Accumulated
cost
Estimated
selling costs
Market price
Corn
Winter wheat
Beef cattle
Sugar beets
No
Yes
No
Yes
$95,000
27,000
50,000
5,000
$4,500
300
2,000
600
Not available, but
greater than cost
Current: $36,600
At harvest: $36,000
$70,000
No current reliable
market price; two
months ago worth
$10,000
ISSUE
What value should Tarheel Farm report on the balance sheet for agricultural products?
ANALYSIS
Under U.S. GAAP, agricultural products are broken up into two groups. The first group
is referred to as growing crops and animals being developed for sale. Generally
speaking, these products are those that have not yet been harvested or fully
developed. The second group is referred to as harvested crops and animals held for
sale. Generally speaking, these products are those that have been harvested or fully
developed. The general rules are as follows:
Growing crops and animals being developed for sale
ASC 905, Agriculture, specifies that growing crops (ASC 905-330-35-1) and animals
being developed for sale (ASC 905-330-35-2) should be reported at the lower of cost
or market.
Harvested crops and animals held for sale
ASC 905, Agriculture, specifies that harvested crops (ASC 905-330-35-4) and animals
held for sale (ASC 905-330-35-3) can be measured at the selling price less the cost of
disposal when the following three conditions are met: the market price is reliable,
realizable and easily determined; the costs of disposal are predictable and fairly
insignificant; and the inventory is currently ready for delivery. If these conditions aren’t
met, then the inventory should be reported at the lower of cost or market.
CONCLUSIONS
The agricultural products should be valued as follows:
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Solution Manual for Intermediate Accounting 1st edition Gordon
Crop Valuation Explanation
Corn
Winter wheat
Beef cattle
Sugar beets
Total
$95,000
36,300
50,000
5,000
$186,300
LCM
FV at financial statement date less selling costs
LCM
LCM since there is no reliable market price
Surfing the Standards Case 2: Inventory in the Agriculture Industry - IFRS2
MEMORANDUM TO THE FILE
TO: Client File – Tarheel Farm, Inc.
FROM: Student Name
DATE: Assignment Date
RE: Allocation of Costs Related to Inventory
FACTS
Tarheel Farm, Inc. (TFI) is a North Carolina corporation involved in agricultural
production and has an October 31 fiscal year-end. It is not publicly traded, but it is
required to prepare annual financial statements for its bank. The bank has required that
these statements comply with IFRS. TFI typically produces four products: beef cattle,
corn, winter wheat, and sugar beets. All four of these products have a life cycle of less
than one year. The remaining relevant facts can be summarized in the following table.
Crop
Development
finished?
Accumulated
cost
Estimated
selling costs
Market price
Corn
Winter wheat
Beef cattle
Sugar beets
No
Yes
No
Yes
$95,000
27,000
50,000
5,000
$4,500
300
2,000
600
Not available, but
greater than cost
Current: $36,600
At harvest: $36,000
$70,000
No current reliable
market price; two
months ago worth
$10,000
2
Adapted from the Ernst & Young Academic Resource Center with permission of the Ernst & Young
Foundation. Copyright 2011. All rights reserved.
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Solution Manual for Intermediate Accounting 1st edition Gordon
ISSUE
What value should Tarheel Farm report on the balance sheet for agricultural products?
ANALYSIS
Using IFRS, agricultural products are broken up into two groups. The first group is
referred to as biological assets. Generally speaking, these products are those that have
not yet been harvested or fully developed. The second group is referred to as
agricultural produce. Generally speaking, these products are those that have been
harvested or fully developed. The general rules are as follows: Biological assets
According to paragraph 12 of IAS 41, biological assets should be valued at fair value
less the estimated selling costs. Paragraph 30 indicates that if a reliable fair value
cannot be determined, then biological assets should be reported at cost.
Agricultural produce
IAS 41, paragraph 13, states that agricultural produce should be measured at fair value
less the estimated selling costs at the point of harvest. This valuation then becomes the
cost basis for further measurement. After the point of harvest, the valuation of
agricultural produce is governed by IAS 2 (see paragraph 3 of IAS 41). Agricultural
produce after the point of harvest is valued at the lower of the cost (measured on the
basis of the rules contained in paragraph 13 of IAS 41) or net realizable value.
IAS 41 paragraph 32 states that agricultural produce is always measured at fair value
less costs to sell at the point of harvest. This paragraph states that the fair value at the
point of harvest can always be measured reliably.
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Solution Manual for Intermediate Accounting 1st edition Gordon
CONCLUSIONS
The agricultural products should be valued as follows:
Crop Valuation Explanation
Corn
Winter wheat
Beef cattle
Sugar beets
Total
$95,000
35,700
68,000
9,400
$208,100
Cost, since FV cannot be reliably determined
Lower of cost or NRV where cost is defined as FV
at harvest less selling costs
FV less disposal costs
Lower of cost or NRV where cost is defined as FV
at harvest less selling costs.
The fair value from two months ago is used as fair
value at harvest since the standard specifically
requires the use of fair value.
Surfing the Standards Case 3: Time Shares
MEMORANDUM TO THE FILE
TO: Client File – Treasure Island Corporation
FROM: Student Name
DATE: Assignment Date
RE: Accounting Treatment for Time-Share Transaction
FACTS
Treasure Island Corporation (TIC) sells time shares in luxury ocean-front cottages. TIC
uses the full accrual method for revenue recognition.
The current project consists of 100 cottages at a cost of $110.24 million. Each cottage
is available for 52 weekly time shares per year.
TIC sold 1,924 weekly time shares in this project in the current year with the following
terms:
Price = $40,000 each
Down payment = 20%, no other payments received this year
Estimate of uncollectible accounts = $0
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Solution Manual for Intermediate Accounting 1st edition Gordon
ISSUE
How should TIC allocate the $110.24 million cost to inventory and cost of goods sold?
ANALYSIS
The guidance for accounting for entities that sell real estate time-share interests is
provided in ASC 978. ASC 978-10 provides an overview and defines relevant terms
used later in the Codification. ASC 978-330 addresses accounting treatment for time-share transactions that
specifically relate to inventory. ASC 978-330-15-3 indicates that this subtopic applies
to all time-sharing transactions accounted for under the full accrual method of revenue
recognition. ASC 978-330-30-1 provides the specific guidance for accounting for inventory and cost
of goods sold when time shares are sold. Paragraph 1 stipulates that entities should
use the relative sales value method for the sales transaction. ASC 978-330-20 defines
the relative sales value method: “Under the relative sales value method, cost of sales is
calculated as a percentage of net sales using a cost-of-sales percentage-- the ratio of
total estimated cost … to total estimated time-sharing revenue.” ASC 978-330-30-1 also refers to ASC 978-605-55-38 for an example. This paragraph
provides a full example for a similar transaction to the one in which TIC is engaged. CONCLUSIONS
TIC will compute cost of sales using the cost-of-sales percentage. The cost-of-sales
percentage is computed as the total estimated cost divided by total estimated
revenues.
Total estimated revenue = 100 cottages x 52 weeks x $40,000 = $208 million Cost-of-sales percentage = $110.24 million / $208 million = 53%
Cost of sales is then computed as sales multiplied by this percentage. Inventory is
measured as the remaining expected revenue multiplied by this percentage. Sales = 1,924 x $40,000 = $76,960,000
Sales $76,960,000
Cost-of-sales percentage 53%
Cost of sales $40,788,800
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Solution Manual for Intermediate Accounting 1st edition Gordon
Total expected revenue $208,000,000 Current year revenue 76,960,000
Remaining expected
revenue
$131,040,000
Cost of sales percentage 53%
Inventory balance $69,451,200
Thus, TIC will record cash of $15,392,000, a note receivable balance of $61,568,000
(80% x $76,960,000), an inventory balance of $69,451,200, sales revenue of
$76,960,000, and a cost of sales of $40,788,800.
Surfing the Standards Case 4: Lower-of-cost-or-market The guidance for this case is found in ASC 330-10-55-2. Paragraph 2 states that if a
price recovery is not certain in the near-term, then a decline in the market price of
inventory below cost should be recorded as a write-down unless substantial evidence
exists that the market price will recover before the inventory is sold. However,
paragraph 2 also indicates that “a write-down is generally required unless the decline is
due to seasonal price fluctuations.” This case does involve judgment – and students could support either an answer that
the inventory should be written down to $18 per dollar less disposal costs or that it
shouldn’t be written down.
In support of the conclusion that a write-down should not be recorded the student
could argue that management is fairly certain that the dolls will sell above cost. In support of the conclusion that a write-down should be recorded the student could
utilize the statement in paragraph 2 that a write down should generally be recorded
unless the price fluctuation is seasonal. The student would assert that the decline
exists and is not seasonal. Basis for Conclusions Case 1: The Use of LIFO
a. The IASB states that their primary reason for not allowing LIFO is that it lacks
representational faithfulness in its depiction of the actual flow of goods.
b. Since this is an opinion question, there is no correct answer. However, the IASB’s
argument seems reasonable – very few entities would actually process their
inventory on a LIFO basis.
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Solution Manual for Intermediate Accounting 1st edition Gordon
Basis for Conclusions Case 2: The Lower of Cost or Market3
Scene 1:
Under U.S. GAAP, we typically think of asset write-downs as being a result of
conservatism. Conservatism is defined in Concepts Statement No. 2 as: “A prudent
reaction to uncertainty to try to ensure that uncertainty and risks inherent in business
situations are adequately considered.” Under IFRS, we typically think of asset write-
downs as being a result of prudence. Prudence is defined in the IASB framework
(paragraph 37) as: “the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions of uncertainty,
such that assets or income are not overstated and liabilities or expenses are not
understated.” Scene 2:
U.S. GAAP seems to be solely focused on the income statement since the only issue
stated is the proper determination of income. IFRS is somewhat broader, discussing
both the cost to be recognized as an asset, as well as the amount to be later
recognized as expense. Scene 3:
Both the write-down and the reversal of the write-down probably do a better job of
presenting balance sheet information than income statement information. Thus, it
makes some sense that IFRS with its broader focus objective would be more likely to
allow the reversal since the objective stated in U.S. GAAP only refers to the income
statement.
Scene 4: No. A very important distinction between reversing a prior write-down and market
valuation is that when a prior write-down is reversed, the gain reported cannot exceed
the original write-down. Thus, the inventory can never exceed its original cost. Under
a fair value system, the inventory would be reported at its market value, no matter
whether that was above or below the original cost. Scene 5:
In general, the U.S. GAAP basis of conclusion does not provide much useful
information (other than the fact that most respondents to the exposure draft of SFAS
No. 144 agreed with the Board), thus the response to this question relies heavily upon
3 Reprinted from the Ernst & Young Academic Resource Center with permission of the Ernst & Young
Foundation. Copyright 2011. All rights reserved.
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Solution Manual for Intermediate Accounting 1st edition Gordon
the information provided in IAS 36. Note that only the reasons stated in IAS 36 that
would apply to inventory are included in the following discussion.
Reasons to oppose:
• Reversals are not consistent with the historical cost system. Since a write-down
results in a new cost basis, a reversal is no different than an upward revaluation.
• Reversals result in increased volatility in reported income.
• Reversals are not useful to users of the financial statements since the inventory
cannot be written up above the original cost.
• Reversals allow for the manipulation of earnings.
• It is costly to continue to evaluate inventory for the need to reverse prior write-
downs.
Reasons to support:
• The asset is now expected to provide greater future economic benefits.
• Since a reversal is not a revaluation, it is not contrary to historical cost
accounting.
• A write-down of inventory is merely an estimate. Thus, a reversal is merely a
change in an estimate, which we do in other areas of accounting.
• Reversals are value relevant to users.
Scene 6:
This is purely an opinion question with no right or wrong answer. However, it could
serve to provide a very interesting classroom discussion.
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