Recognition of inventories as an expense

Learning objectives

• Explain that the carrying amount of inventories sold is recognised as an expense in the period in which the related revenue is recognised, that write-downs and losses are expenses of the period in which they occur, and that reversals reduce the expense of the period in which the reversal occurs.L1, L2
• Calculate the cost of inventories recognised as an expense during a period.L1, L2
• Determine the treatment of inventories allocated to other assets (for example, incorporated in self-constructed property, plant or equipment), recognised as an expense over the useful life of that asset.L2, L3
• Recognise the cost of sales and the transfer of inventories to property, plant and equipment.L1, L2

Normative references

• IAS 2 §34When inventories are sold, their carrying amount is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period in which the write-down or loss occurs. The amount of any reversal of a write-down arising from an increase in net realisable value is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
• IAS 2 §35Some inventories may be allocated to other asset accounts, for example inventory used as a component of self-constructed property, plant or equipment. They are then recognised as an expense during the useful life of that asset.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

21 questions

• Céramiques Ondaine resells earthenware tiles and applies weighted average cost calculated over the period. For 20X1: opening inventory of {opening_qty} boxes at {opening_unit_cost}; purchases of {purchase_qty} boxes at {purchase_unit_cost}; sales of {sold_qty} boxes. Revenue has already been recognised. Record the entry recognising the cost of sales for the year.L2
• The building materials trader Saint-Clar Bâtiment measures its concrete blocks using FIFO. During the quarter, it sold {sold_qty} blocks; at the start of the quarter it held {opening_qty} blocks valued at {opening_unit_cost} each and it bought {purchase_qty} at {purchase_unit_cost} each. The sales have already been recorded as revenue. Which entry recognises the cost of the blocks sold?L2
• At the reporting date, Lunetterie Opaline holds frames from a collection that has become obsolete, with a cost of {cost}. Their net realisable value, estimated from clearance prices, is {nrv}. Record the write-down entry.L2
• At the reporting date, Cycles Arvelle holds electric bikes of a superseded model, with a cost of {bike_cost}, an estimated selling price of {bike_price} and estimated costs necessary to make the sale of {bike_selling_costs}. It also holds accessories unrelated to this model, with a cost of {accessory_cost} and a net realisable value of {accessory_nrv}. The finance director proposes recording nothing, as the unrealised gain on the accessories covers the loss on the bikes. Record the required entry.L3
• Électronique Valbrune has a reporting date of 31 December 20X1. It holds 5,000 tablets of the same model, at a unit cost of 300. At the reporting date, the list price is 360 and the costs necessary to make the sale are estimated at 20 per unit. A competitor launched a more powerful model in November 20X1, which was already weighing on demand at the reporting date. In January 20X2, before the financial statements are finalised, Valbrune sells 1,200 tablets at 290 each, and its sales team states that the rest of the batch cannot be sold above that price, with selling costs remaining at 20 per unit. On 25 February 20X2, still before the financial statements are finalised, Valbrune decides to launch a new version of its tablet, which brings the price of the old model down to 240. Write a memo determining the measurement of the batch at 31 December 20X1.L4
• Horlogia holds an inventory of diving watches with a cost of {cost}, reduced at the end of 20X1 to {carrying_before}. At the end of 20X2, the watches are still in inventory and the rise in market prices brings their net realisable value to {revised_nrv}. Record the entry at the end of 20X2.L2
• Tonnellerie Sablière keeps in inventory oak barrels that cost it {cost}. Overproduction had led to carrying them at {carrying_before} at the previous year-end. This year, a shortage of stave wood drives prices up and the net realisable value of the barrels reaches {revised_nrv}. Record the effect of this development at the year-end.L3
• At the end of 20X1, Brivane reduced an inventory of solar panels with a cost of €90,000 to €70,000, after a collapse in selling prices. At the end of 20X2, the panels are still in inventory; a new public support scheme has clearly pushed prices back up, and net realisable value is estimated at €98,000. Management is hesitating between several treatments. Which one complies with IAS 2?L3
• In 20X3, Pavane reverses €4,000 of a write-down recognised in 20X2 on rugs still in inventory, as their net realisable value has recovered. How is this reversal presented?L3
• True or false: when inventories are sold, their carrying amount is recognised as an expense in the period in which the related revenue is recognised.L1
• During the year-end physical count, the hardware store Brassac finds that goods have disappeared following a theft. When is the corresponding loss of inventories recognised as an expense?L1
• Mavrel takes metal sections from its inventories to build a hangar itself, which it will use for its own needs. True or false: the carrying amount of the sections used is recognised immediately as an expense, since they will never be sold.L2
• The bookshop Pagerie had opening inventories of {opening_inventory}. During the year, it bought books at a cost of {purchases}. Its closing inventories, measured at cost, amount to {closing_inventory}. All decreases in inventories are sales whose revenue is recognised in the year; there were no losses and no write-downs. Compute the amount of inventories recognised as an expense for the year.L1
• For 20X2, the wholesaler Distrimax reports: carrying amount of goods sold {carrying_sold}; write-downs to net realisable value recognised at the year-end {write_downs}; goods destroyed by water damage {losses}; reversal of a 20X1 write-down on items still in inventory whose selling price has recovered {reversals}. Compute the total amount of inventories recognised as an expense in 20X2.L2
• The household appliance retailer Électroprime recognised revenue of {revenue} in 20X1 (given, determined under IFRS 15). The appliances sold had a carrying amount of {carrying_sold}. At the year-end, models that had become obsolete were written down by {write_downs}, and breakage found in the warehouse represents {losses}. Finally, a batch of air conditioners written down last year and still in inventory saw its net realisable value recover, hence a reversal of {reversals}. What amount of inventories is recognised as an expense in 20X1?L2
• The Ombrelle shop sells in March a batch of umbrellas whose carrying amount in inventory is {carrying_amount}. The revenue from the sale is recognised in March (given). Record the entry for the derecognition of the inventories.L1
• Galerie Mobilis had acquired designer sofas at a cost of {cost}. At the end of 20X1, these sofas were reduced to their net realisable value, i.e. a carrying amount of {carrying_amount}. They are sold in February 20X2, revenue being recognised at that date (given). Record the derecognition of the sofas.L2
• The equipment maker Mécanor takes spare parts from its inventories, with a carrying amount of {carrying_amount}, to assemble a machine that it will use in its own workshop. Record the allocation of these parts.L2
• The telecoms operator Fibrelia holds reels of optical fibre intended for resale to installers. It decides to use part of them, with a carrying amount of {carrying_amount}, to roll out its own network, which it accounts for as property, plant and equipment. The controller proposes to recognise these reels as an expense of the year. Record the correct entry.L3
• To train the new accountants of Quarzine, the finance director writes statements on the recognition of inventories as an expense. Select those that are correct.L2
• In 20X1, the building materials merchant Bâtir Solenne sells to its customers bricks with a carrying amount of €60,000, the related revenue being recognised in 20X1 (given). It also uses bricks from its inventory, with a carrying amount of €45,000, to build its new head office, which it will occupy itself and account for as property, plant and equipment. Which treatment should be applied for 20X1?L3