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cpa_ca
Newbie
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Joined: 19 Mar 2009
Online Status: Offline
Posts: 40

Posted: 21 Mar 2009 at 15:15 \| IP Logged

Can any one explain the answer for this one?

Due to a decline in market price in the second quarter,
Petal Co. incurred an inventory loss. The market price
is expected to return to previous levels by the end of
the year. At the end of the year the decline had not
reversed. When should the loss be reported in Petal's
interim income statements?

a. Ratably over the second, third, and forth [sic]
quarters.
b. Ratably over the third and fourth quarters.
c. In the second quarter only.
d. In the fourth quarter only.

Choice "d" is correct. When the loss is probable and
estimable, the expected loss must be recorded in full.
This loss becomes such at the end of the fourth quarter.
Therefore, the inventory must be valued on the year-end
at the lower of cost or market, recognizing the loss at
that time.

My question: why not recognize in 2nd quarter since the
loss has already occurred then?

Thanks a lot!

divyagovil1
Major Contributor

Joined: 30 Jan 2009
Location: India
Online Status: Offline
Posts: 1456

Posted: 21 Mar 2009 at 17:17 \| IP Logged

In Interim reporting, temporary market declines that are expected to reverse before the end of the annual period should not be recognized in interim period statements.

In the second quarter, loss was not probable as It was expected to return to previous levels by year end.

In this case, loss became probable only in fourth quarter as the decline had not reversed. Thus, loss would be recognized in fourth quarter !

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cpa_ca
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Joined: 19 Mar 2009
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Posted: 21 Mar 2009 at 20:30 \| IP Logged

Thank you very much! Your answer could not be more
clear.

Sorry, you can NOT post a reply.
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