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At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price by a material amount. Which of the following accounting treatments is most appropriate?
A. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss.
B. Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the income statement.
C. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account.
D. Neither describe the purchase obligation nor recognize a loss on the income statement or balance sheet.
answer A is the right option . Recognize a loss and a liability .
B. Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the income statement
Option C is the most appropriate accounting treatment for Inventory.
C. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account.
As per IAS2 the Inventory has to be recognized at Cost or Net Realizable Value (NRV) in present case the cost of Inventory is less than its Purchase price. So it will be recognized at NRV and Loss will be booked in P & L A/c
