CMA Intermediate · Corporate Accounting and Auditing · Inventories (Ind AS 2)
Mehta Retail uses the retail method for a department. Inventory at selling price is ₹2,40,000 and the appropriate gross margin is 25% of sales value. Which treatment is consistent with Ind AS 2?
Cost is ₹1,80,000: selling value of ₹2,40,000 less 25% gross margin. Ind AS 2 requires the percentage to take into account inventory marked down below its original selling price.
- ACost is ₹1,80,000, with the percentage taking account of marked-down inventoryCorrect
- BCost is ₹3,00,000, by adding the margin to selling price
- CCost is ₹1,92,000, by applying 25% on cost
- DCost is ₹1,80,000, ignoring markdowns entirely
Explanation
The retail method reduces sales value by the gross margin percentage: 2,40,000 × (1 − 0.25) = ₹1,80,000. The percentage used must consider inventory marked down below original selling price, so ignoring markdowns is wrong. Adding margin to sales value or treating 25% as a markup on cost is incorrect.
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