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yukagin
Contributor

Joined: 03 Jun 2010
Online Status: Offline
Posts: 84

Posted: 05 Feb 2011 at 04:26 \| IP Logged

An inventory loss from a market price decline occurred in
the first quarter, and the decline was not expected to
reverse during the fiscal year. However, in the third
quarter the inventory's market price recovery exceeded
the market decline that occurred in the first quarter.
For interim financial reporting, the dollar amount of net
inventory should:

a.Decrease in the first quarter by the amount of the
market price decline and increase in the third quarter by
the amount of the decrease in the first quarter.

b.Decrease in the first quarter by the amount of the
market price decline and increase in the third quarter by
the amount of the market price recovery.

c.Decrease in
the first quarter by the amount of the market price
decline and not be affected in the third quarter.

d.Not
be affected in either the first quarter or the third
quarter.

Explanation
Choice "a" is correct. Market price declines should be
recognized in the interim period in which decline is
judged permanent and later, if they "turn around," are
recognized as gains in subsequent periods only to the
extent of previously reported losses. Choice "b" is
incorrect. Recovery should not cause an increase in
inventory value above original cost. Choice "c" is
incorrect. The recovery should be recognized to the
extent of the first quarter write down. Choice "d" is
incorrect.

seems to me that it's not clear the market price decline
is PERMANENT, so i thought the answer would be D but it's
A.

__________________
REG82,BEC79,FAR 5/31/11 (waiting)

MAII
Newbie
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Joined: 28 Jan 2011
Online Status: Offline
Posts: 17

Posted: 05 Feb 2011 at 17:40 \| IP Logged

The question is saying that it does not expect the decline to reverse during the year. Meaning its permanent. So the decrease should be recorded in the first quarter and increase is recorded in the 3rd quarter.

If the question says that it does expect to reverse during the year, then that means its not permanent, so then the decrease would not be recorded in the 1st quarter.

__________________
REG - 80
FAR - 72. 2/19/11 -
BEC -
AUD -

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