Kensington Ltd is an importer and retailer of European made glass crystals.For the year ended 30 June 2008,Kensington Ltd still holds 30 units of an item originally purchased for $10,000 each and a net realisable value of $8,000.On 1 June 2009 the TV show "Home Improvement" featured a similar item prompting an increase in demand for this glass crystal.Management believes that the net realisable value of this item is now $15,000.All 30 items remain unsold on 30 June 2009.What is the effect of holding this inventory on the income statement of Heffron Ltd for the years ended 30 June 2008 and 2009?

Question

Quizplus · Accepted Answer

The inventory items have a net realisable value lower than their cost in 2008, resulting in a decrease of profit by $60,000 [(30 units) x ($10,000 - $8,000)]. In 2009, the increase in demand for the item resulted in an increase in net realisable value, increasing the profit by $60,000 [(30 units) x ($15,000 - $10,000)]. Therefore, the overall effect is a decrease in profit by $0.

Kensington Ltd Is an Importer and Retailer of European Made