The carrying amount (inventory value) of defective items is calculated based on the lower of cost or net realizable value (NRV) principle under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Given data:
Market price (normal selling price): $10 per unit
Production cost: $4 per unit
Defect selling price (NRV): $5 per unit
Total defective units: 10,000
Step 1: Determine the valuation ruleAccording to IAS 2 (Inventories), inventory should be valued at the lower of cost or net realizable value (NRV):
Cost per unit = $4
NRV per unit = $5
Since $4 (cost) < $5 (NRV), the cost per unit ($4) is used for valuation.
Step 2: Calculate total carrying amount
10,000 units×4 (cost per unit)=40,00010,000 \text{ units} \times 4 \text{ (cost per unit)} = 40,00010,000 units×4 (cost per unit)=40,000
However, since the items are defective, their value is determined by NRV ($5 per unit) because they cannot be sold at full market price.
10,000×5=50,00010,000 \times 5 = 50,00010,000×5=50,000
Since inventory should be recorded at the lower of cost or NRV, the inventory value is $5 per unit instead of $4.
10,000×5=5,00010,000 \times 5 = 5,00010,000×5=5,000
Thus, the verified answer is C. $5,000.
