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ACCA Applied Knowledge · Financial Accounting · Statement of profit or loss and other comprehensive income

Tarn Co's draft cost of sales is $480,000 using closing inventory of $65,000 at cost. A review finds that items with a cost of $20,000 are damaged and can be sold for $12,000 after repair costs of $3,000. What is the corrected cost of sales?

Corrected cost of sales is $491,000. The damaged items must be valued at net realisable value of $9,000 (selling price $12,000 less repair costs $3,000), not cost of $20,000. The $11,000 write-down reduces closing inventory and increases cost of sales.

  1. A$488,000
  2. B$483,000Correct
  3. C$480,000
  4. D$491,000

Explanation

Inventory is valued at lower of cost and net realisable value. NRV of the damaged items = 12,000 - 3,000 = 9,000, so the write-down is 20,000 - 9,000 = 11,000. Closing inventory falls to 54,000 and cost of sales rises by 11,000 to 491,000. Option 491,000 is therefore correct.

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