Rani is a trader. Her financial year ends on 31 March. She provided the following information about her three types of inventory at 31 March 2020. Inventory item Number of units Cost per unit $ Selling price per unit $ Selling expenses per unit $ A 110 17 20 2 B 85 18 19 1 C 90 15 16 2 Rani later discovered that she had an amount of inventory of item D at 31 March 2020. This inventory originally cost $1660. She considered this inventory to be obsolete.

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. [1] Item A: Value = 110 units × $17 = $1870 (Lower of cost 17 and NRV (20-$2=$18) is $17)
2. [1] Item B: Value = 85 units × $18 = $1530 (Lower of cost 18 and NRV (19-$1=$18) is $18)
3. [1] Item C: Value = 90 units × $14 = $1260 (Lower of cost 15 and NRV (16-$2=$14) is $14)
4. [1] Total inventory value = $1870 + $1530 + $1260 = $4660
5. [1] The net realisable value is lower than the cost so item D should be recorded at its net realisable of zero
6. [1] There will be no effect on profit
7. [1] Advantage: The obsolete inventory is a loss to Rani's business
8. [1] Advantage: She will wish to avoid such losses in the future
9. [1] Advantage: Holding inventory necessitates storage costs
10. [1] Advantage: If Rani stops buying item D, she may have funds available for other business opportunities
11. [1] Advantage: Rani had difficulty in monitoring four types of inventory
12. [1] Disadvantage: Rani needs to consider that it may be risky to stock only three of the four lines of inventory in the future
13. [1] Disadvantage: There may be customer demand in future for item D
14. [1] Disadvantage: Customers who have to start buying item D from another supplier may also buy items A, B and C from them
15. [1] Recommendation
16. [1] Dates (both sides)
17. [1] Balance b/d (1 Apr 2019) 420 (Cr) AND 300 (Dr)
18. [1] Income statement 6320 (OF) (Cr)
19. [1] Bank 6000 (Dr)
20. [1] Irrecoverable debts 300 (Dr)
21. [1] Balance c/d (31 Mar 2020) 500 (Cr) AND 400 (Dr)
22. [1] Balance b/d (1 Apr 2020) 500 (Cr) AND 400 (Dr)
23. [1] Sales of inventory are included in calculation of the gross profit
24. [1] Advertising income is included as other income after the calculation of the gross profit
25. [1] If sales of inventory are included as advertising income the gross profit will be understated