CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory
Mehta Traders Ltd. is a retailer using the retail method. At year end, goods at selling price in stock are ₹6,00,000. The average gross margin on selling price is 25%. Under AS 2, what is the approximate cost of this inventory?
The inventory cost is ₹4,50,000. Under the retail method permitted by AS 2, cost is found by deducting the average gross margin percentage from selling price. With a 25% margin on selling price, cost is 75% of ₹6,00,000.
- A₹4,50,000Correct
- B₹4,80,000
- C₹7,50,000
- D₹1,50,000
Explanation
Cost = selling price less margin on selling price: 6,00,000 x (1 - 0.25) = ₹4,50,000. Option 4,80,000 wrongly deducts 20% (treating margin as on cost). 7,50,000 grosses up instead of reducing.
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