Reference no: EM132608635

Inventories was first issued in October 1975, and most recently revised in December 2003. Its most important principle is that inventories be measured at the lower of their cost and their net realisable value. Herald plc (Herald) manufactures plastic water tanks for the farming industry. On 31 May 2013, its closing inventory consisted of 950kg of plastic resin raw material, and also 250 finished units (plastic water tanks).

Plastic:

The purchase price of plastic resin was € 3 per kg throughout the year to 31 May 2013. Delivery costs an additional € 0.50 per kg. Herald has a policy of always keeping plenty of plastic resin in inventory, as its supply can be unreliable. However, close to the year-end, the price of plastic resin collapsed due to market oversupply.

The purchase price of Herald's raw material is now € 2.10 per kg plus the €0.50 per kg delivery charge. The existing inventory of plastic resin can be sold in the market for € 1.80 per kg net of all costs.

Tanks:

Each tank requires 10 kg of plastic to manufacture, plus each unit incurs € 25 in conversion costs (labour and overhead). Herald sells the tanks for € 100. It is expected that this price will drop to € 90 as a result of the fall in the market price of plastic. All completed units sold by Herald incur a € 6 selling and distribution cost.

REQUIREMENT:

Question (a) Describe how the "cost" of inventory is determined under IAS 2

Question (b) Discuss the principles for determining the "Net Realisable Value" of inventory under IAS 2.

Question (c) Calculate the value of closing inventory in the books of Herald plc at 31 May 2013 applying the principles ias 2