Q-1 Import duties are not included in the inventory valuation for inventory held in a customsfree zone.

Import duties do not arise from shipping the cars to the customs-free zone. Therefore, they are not included in the inventory valuation at that point. Import duties payable are included in the cost of inventory when the cars leave that zone. Q-2 A rebate of 1.03 (being 10% of 10.3) million $ from B should be considered as a separate asset, which is credited to the cost of sales (0.77 million $ being [(10.3-2.6)/10.3] x 1.03) as well as to the cost of inventories (0.26 million euro being (2.6/10.3) x 1.03). This rebate is driven by the purchases in the period and should therefore be allocated to the cost of cameras purchased and sold within the period as well as to cameras purchased, but not yet sold. The rebate is regarded as a deduction from the cost of sales and inventories because it is purchase-related. Q-3 The costs incurred in editing, translating and collecting the data should be included in the cost of inventories, as they are direct costs related to preparing the travel guides for use. Q-4 Capitalisation of storage costs is allowed only if the storage is necessary in the production process prior to a further production stage Q-5 Management should allocate overhead costs to inventory at a rate of 0.53 per hour. Production overhead absorption rate: = production overhead / labour hours for normal capacity = 4,000/7,500 = 0.53 per hour Each closing inventory unit has taken 1 hour to produce (8,500 hours/8,500 units produced). Production overhead recognised as part of cost of inventory is: = number of units of closing inventory x number of hours to produce each unit x production overhead absorption rate = 2,300 x 1 x 0.53 = 1,219 The remaining 2,781 (4,000 1,219) is recognised as an expense in the income statement.

Q-6 No, until it is known that the goods have been sold (whether to a third party or to the distributor after three months), the goods should be treated as the manufacturers inventory, that is, consignment inventory, and excluded from the distributors balance sheet. Arrangements where a manufacturer supplies goods to a distributor on consignment are common in certain industries. These arrangements enable the dealer to maximise sales. The manufacturer usually retains title to the product and thereby substantial risks and rewards until triggered by some event when title is transferred. Q-7 The inventory should be written down to NRV. The high inventory levels indicated slow demand from the manufacturer. The post balance sheet announcement confirmed the over-supply at year end.