Motivation and Organizational Performance

Case study 1: Shiny Corp. carries its inventory at the lower of cost and net realizable value. At December 31, 2005, the cost of inventory, determined under the first-in, first-out (FIFO) method, as reported in its financial statements for the year then ended, was $10 million. Due to severe recession and other negative economic trends in the market, the inventory could not be sold during the entire month of January 2006. On February 10, 2006, Shiny Corp. entered into an agreement to sell the entire inventory to a competitor for $6 million.

Required

Presuming the financial statements were authorized for issuance on February 15, 2006, should Shiny Corp. recognize a write-down of $4 million in the financial statements for the year ended 31, 2005?

Solution Yes, Shiny Corp. should recognize a write-down of $4 million in the financial statements for the year ended December 31, 2005.

Examples of non adjusting events include

• Declaration of an equity dividend

• Decline in the market value of an investment after the balance sheet date

• Entering into major purchase commitments in the form of issuing guarantees after the balance

sheet date

• Classification of assets as held for sale under IFRS 5 and the purchase, disposal, or expropriation

of assets after the balance sheet date

• Commencing a lawsuit relating to events that occurred after the balance sheet date

CASE3: An entity is preparing its financial statements for the year ending November 30, 20X5. Certain items of plant and equipment were scrapped on January 1, 20X6. At November 30, 20X5, these assets were being used in production by the entity and had a carrying value of $5 million. The value-in-use of the asset at November 30, 20X5, was deemed to be $6 million, and its fair value less costs to sell was thought to be $50,000 (the scrap value).

Required

What is the recoverable amount of the plant and equipment at November 30, 20X5?

Solution

The recoverable amount is the higher of the assets’ fair...