To: Kelly Corp. Accounting Files

Case 4.5

Memorandum

To: Kelly Corp. Accounting Files

From: Luyang Shi, Plant Accountant

Date: 02/16/2019

Re: Accounting for the appropriate pricing of bauxite to aluminum manufacturers.

Facts

Kelly Corp. leased a mine and has recently extracted 1,000 kilograms of bauxite. Bauxite is a mineral that is used in making aluminum. Kelly Corp. plans to sell the bauxite to aluminum manufacturers at its selling price. Kelly Corp. must determine whether their bauxite inventory can be carried at above cost.

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Issues

1. Does the sale of bauxite meet all conditions provided in FASB Accounting Standard Codification 330-10-35-16(b)?

Analysis- Issue 1: Does the sale of bauxite meet all conditions provided in ASC 330-10-35-16(b)?

FASB ASC 330-10 (Inventory) provides guidance for determining how to account for inventories and the recognition of income based on the appropriate costs. The requirements are described in par. 35-16 of ASC 330-10, as follows:

35-16 It is generally recognized that income accrues only at the time of sale, and that gains may not be anticipated by reflecting assets at their current sales prices. However, exceptions for reflecting assets at selling prices are permissible for both of the following:

1. Inventories of gold and silver, when there is an effective government-controlled market at a fixed monetary value
2. Inventories representing agricultural, mineral, and other products, with all of the following criteria:

1. Units of which are interchangeable
2. Units of which have an immediate marketability at quoted prices
3. Units for which appropriate costs may be difficult to obtain.

The assumptions that the market for bauxite is active and quoted prices are available have been considered. With the assumptions, the bauxite inventory cannot be recorded at above cost.

Conclusion- Issue 1

Kelly Corp. has finished evaluating if the bauxite inventory can be recorded at its selling price and has concluded that it did not meet condition No. 3 under 35-16(b). Under ASC 330-10-35-16(b), the inventory must have interchangeability, easy to find quoted prices, and appropriate costs may be difficult to obtain. However, it is unclear that if the transaction meets condition No. 3. If the market is active, unless the difficulty is fully evaluated and stated otherwise, it is not difficult for aluminum manufacturers to obtain appropriate cost of bauxite, more information is required. Therefore, Kelly Corp. cannot record the transaction at above cost with the given description.