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CA Intermediate · Advanced Accounting · AS 25 Interim Financial Reporting

Rao Engineering Ltd (calendar-year reporting is not followed; year ends 31 March) values inventory at cost or NRV, whichever is lower. At 30 June, the cost of a raw material lot was Rs 8,00,000 and NRV was Rs 7,10,000. At 30 September, the NRV recovered to Rs 8,50,000, the lot still being held. Ignoring other items, which statement correctly applies AS 25 and AS 2 to the interim reports?

The company writes inventory down by Rs 90,000 at 30 June to NRV of Rs 7,10,000, then reverses the whole Rs 90,000 at 30 September when NRV recovers. Inventory is restored only to cost of Rs 8,00,000, because carrying amount cannot exceed cost under AS 2 as applied at interim dates by AS 25.

  1. AWrite down Rs 90,000 at 30 June; reverse the full Rs 90,000 in the quarter to 30 September, with inventory at cost Rs 8,00,000Correct
  2. BWrite down Rs 90,000 at 30 June; reverse Rs 1,40,000 in the quarter to 30 September, with inventory at Rs 8,50,000
  3. CDo not write down at 30 June as the loss is temporary; no entry at 30 September
  4. DWrite down Rs 90,000 at 30 June and carry it forward without reversal, with inventory at Rs 7,10,000 at 30 September

Explanation

AS 25 requires inventory write-downs to NRV at interim dates as at year end. At 30 June, the loss is Rs 8,00,000 - 7,10,000 = Rs 90,000. When NRV later rises, AS 2 allows the write-down to be reversed only up to original cost, so Rs 90,000 is reversed and inventory is at Rs 8,00,000. Reversal to Rs 8,50,000 would exceed cost.

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