ACCT5001 S1 2010

Self-Study Solutions

Week 6

ACCT5001 S1 2010

Self-Study Solutions

Week 6

Ch.5: Q4, Q8, BE5.4, E5.1, PSA5.1, PSA5.3, PSA5.5, PSA5.6

EXERCISE 5.1

4.

The primary basis of accounting for inventories is cost in accordance with the cost principle. The major objective for inventories is the proper determination of profit in accordance with the matching principle. Lucy should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the net realisable value of the goods is less than its cost. The write-down to net realisable value should be recognised in the period in which the price decline occurs. AASB 102 defines net realisable value as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale (i.e. marketing, selling and distributing to customers). (a) (1) 5 April Purchases Accounts Payable

Hans Ltd

8.

18,000 18,000

Purchase from D Nicks Ltd FOB(SP) 2/7, n/30 (2) 6 April Freight-in Cash Freight cost on D Nicks Ltd purchase 5 April (3) 7 April Equipment Accounts Payable Purchase of equipment on account 26,000 26,000 900 900

(b)

BRIEF EXERCISE 5.4

Sweet Pea Garden Centre (4) Inventory Categories Cost NRV* LCNRV (5) Native trees Potting mix Garden statues Total valuation *NRV is net realisable value The lower of cost and net realisable value (LCNRV) is $44,800. $16,800 12,600 19,600 $49,000 $14,280 13,300 17,920 $45,500 $14,280 12,600 17,920 $44,800 (b) 4 May 9 April 8 April Accounts Payable Purchase Returns and Allowances Returned $3,000 damaged goods to D Nicks Ltd Accounts Payable ($18,000 - $3,000) Discount Received [($18,000 - $3,000) x 2%] Cash ($15,000 - $300) Full settlement of D Nicks Ltd account Accounts Payable ($18,000 - $3,000) Cash 15,000 15,000 15,000 300 14,700 3,000 3,000

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ACCT5001 S1 2010 Week 6 Self-Study Solutions.doc

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ACCT5001 S1 2010

Self-Study Solutions

Week 6

ACCT5001 S1 2010 (b)

Self-Study Solutions

Week 6

PROBLEM SET A 5.1

(a)
Date Particulars

The Golf House Pty Ltd

Debit 3,640 3,640 112 112 140 140 1,680 1,680 924 924 3,500 70 3,430 1/10 84 84 840 8 832 1,260 1,260 42 42 840 840 1,540 1,540 9/10 12/10 17/10 18/10 Purchase returns Discounts and cash Purchase returns Discounts and cash Opening Balance 1/11 Opening Balance 10/10 20/10 Sales Sales 1/11 Opening Balance Credit 1/10 31/10 Oct. 5 Purchases Accounts Payable Balata Ltd FOB(SP) 2/7, n/60 7 Freight-in Cash Freight on Balata Ltd purchase 5 Oct 9 Accounts Payable Purchase Returns and Allowances $140 credit goods returned to Balata Ltd 10 Accounts Receivable Sales Sale n/30 12 Purchases Accounts Payable Arrow Sportswear 1/7, n/30 12 Accounts Payable ($3,640 - $140) Discount Received ($3,500 x 2%) Cash ($3,500 - $70) Settlement of Balata Ltd account 17 Accounts Payable Purchase Returns and Allowances Return goods to Arrow Sportswear 18 Accounts Payable ($924 - $84) Discount Received Cash ($840 - $8) Settlement of Arrow Sportswear account 20 Accounts Receivable Sales Sale n/30 27 Sales Returns and Allowances Accounts Receivable Credit issued for goods returned 30 Cash Sales Cash sale 30 Cash Accounts Receivable Settlement on customer accounts 30/10 Opening Balance Sales Accounts receivable

Cash 3,500 7/10 840 12/10 1,540 21/10 31/10 5,880 1,506 Freight-in Accounts payable Accounts payable Closing Balance 112 3,430 832 1,506 5,880

Accounts Receivable 1,680 27/10 1,260 30/10 Sales returns Cash 42 1,540 1,358 2,940 1,358 2,940

Inventory 4,900

Accounts Payable 140 5/10 3,500 12/10 84 840 4,564 1/11 Opening Balance 4,564 $Purchases Purchases 3,640 924

Share Capital 1/10 Opening Balance 8,400

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ACCT5001 S1 2010 Week 6 Self-Study Solutions.doc

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ACCT5001 S1 2010

Self-Study Solutions Sales 10/10 20/10 30/10 Accounts Receivable Accounts receivable Cash

Week 6

ACCT5001 S1 2010

Self-Study Solutions

Week 6

1,680 1,260 840 3,780

(c) The Golf House Pty Ltd Trial Balance as at 31 October 2010 Debit Cash Accounts Receivable $1,506 1,358 4,900 8,400 3,780 42 4,564 224 78 112 $12,482 $12,482 Credit

Sales Returns and Allowances 27/10 Accounts receivable 42

Inventory Accounts Payable Share Capital Sales

Purchases 5/10 12/10 Accounts payable Accounts payable 3,640 924 4,564

Sales Returns and Allowances Purchases Purchase Returns and Allowances Discount Received Freight-in

Purchase Returns and Allowances 9/10 17/10 Accounts payable Accounts payable 140 84 224 (d) Date Particulars Debit 9,618 Inventory Accounts payable Accounts payable 70 8 78 Sales returns and allowances Purchases Freight-in Freight-in 7/10 Cash 112 Oct 31 Inventory Sales Purchases returns and allowances Discount received P&L summary (To close various credit accounts to P&L Summary) 5,880 3,780 224 78 9,962 (To close various debits amounts to the P&L Summary) 4,900 42 4,564 112 Credit

Oct 31 P&L summary Discount Received 12/10 18/10

ACCT5001 S1 2010 Week 6 Self-Study Solutions.doc

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ACCT5001 S1 2010 Week 6 Self-Study Solutions.doc

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ACCT5001 S1 2010

Self-Study Solutions

Week 6

ACCT5001 S1 2010

Self-Study Solutions

Week 6

PROBLEM SET A 5.3 (e) The Golf House Pty Ltd Income Statement (partial) for the month ended 31 October 2010 (a) Date Sound Around Town Ltd Cost of Goods available for Sale Explanation Units 900 2,100 3,300 2,400 900 9,600 Unit Cost $7 8 9 10 11 Total Cost $6,300 16,800 29,700 24,000 9,900 $86,700

March 1 Beginning inventory 5 Purchase Sales revenues: Sales Less: Sales returns and allowances Net sales revenue Cost of goods sold: Beginning inventory 1 October Purchases Less: Purchase returns and allowances Net purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale Ending inventory 31 October Cost of goods sold Gross profit $4,564 (224) 4,340 112 4,452 9,352 (5,880) (3,472) $266 March 26 21 900 600 *1,500 *9,600 8,100 $11 10 Date Units Unit Cost (b) FIFO (1) Ending Inventory 4,900 $3,780 (42) 3,738 26 Purchase Total 13 Purchase 21 Purchase

Total Cost $9,900 6,000 $15,900

(2)

Cost of Goods Sold

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$86,700 (15,900) $70,800

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ACCT5001 S1 2010 Week 6 Self-Study Solutions.doc

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ACCT5001 S1 2010

Self-Study Solutions

Week 6

ACCT5001 S1 2010

Self-Study Solutions

Week 6

Proof of Cost of Goods Sold Proof of Cost of Goods Sold Date March 1 5 13 21 Units 900 2,100 3,300 1,800 8,100 Unit Cost $7 8 9 10 Total Cost $6,300 16,800 29,700 18,000 70,800 Date March 26 21 13 5 Units 900 2,400 3,300 1,500 8,100 Unit Cost $11 10 9 8 Total Cost $9,900 24,000 29,700 12,000 75,600

LIFO (1) Date March 1 5 Ending Inventory Units 900 600 1,500 Unit Cost $7 8 Total Cost $6,300

WEIGHTED-AVERAGE COST

(1)

Ending Inventory

$86,700 9,600 = $9.03* to nearest cent 4,800 $11,100 Units Unit Cost 1,500 (2) Cost of Goods Sold (2) Cost of goods available for sale Less: Ending inventory Cost of goods sold $86,700 (11,100) $75,600 Cost of goods available for sale Less: Ending inventory Cost of goods sold $86,700 (13,545) $73,155 Cost of Goods Sold $9.03 Total Cost $13,545

(c)

(1) As shown in (b) above, FIFO produces the highest inventory amount, $15,900. (2) As shown in (b) above, LIFO produces the highest cost of goods sold, $75,600.

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ACCT5001 S1 2010 Week 6 Self-Study Solutions.doc

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ACCT5001 S1 2010

Self-Study Solutions

Week 6

ACCT5001 S1 2010

Self-Study Solutions

Week 6

PROBLEM SET A 5.6 PROBLEM SET A 5.5 (a) World Building Products Ltd Ski Lifts Ltd

(a) Date 1/7 2010 Inventory turnover ratio 6/7 11/7

(1)

FIFO Purchases Sales $475 (3 @ $95) $285 Balance (5 @ $95) (2 @ $95) (2 @ $95) (4 @ $106) $614 $475 $190

(5 @ $95)

$306,729.8 0 ($31,465.2 0$31,738.20 )2

9.7

(4 @ $106)

$424

14/7 Days in inventory

(2 @ $95)} (1 @ $106)} $296 (3 @ $106) (3 @ $106)} (3 @ $112)} $654 $318

365 37.6 days 9.7

$115,343.8 0 0.93 : 1 $124,295.6 0

21/7

(3 @ $112)

$336

Current ratio

27/7

(3 @ $106)} (1 @ $112) $430 +Ending inventory $224 ($2 @ $112) $224

(b)

The inventory turnover ratio indicates the number of times on average that inventory is sold during the period. The average days in inventory indicates the average number of days it takes to sell the inventory. Date 1/7

(2)

WEIGHTED-AVERAGE COST Purchases Sales Balance (5 @ $95) (3 @ $95) $285 (2 @ $95) $475 $190

(5 @ $95)

$475

(c)

Generally it is considered to be better to have a higher inventory turnover or lower number of days in inventory as this means that inventory is selling faster. This is beneficial to the entity as it will have less cash tied-up in inventory and there is less chance that the inventory will become obsolete. If the inventory turnover ratio is too high, it may be an indication that the entity may not have enough inventory and may lose customers. Businesses which sell perishable items will generally have higher inventory turnover ratios than businesses which sell non-perishable items.

6/7 11/7 14/7 21/7 27/7 (3 @ $112) $336 (4 @ $106) $424

(6 @ $102.33)*$614 (3 @ $102.33) $307 (3 @ $102.33) $307 (6 @ $107)** $642 (4 @ $107) $428 (2 @ $107) $214

*$614 6 = $102.33 **$642 6 = $107 +Ending inventory = 214

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ACCT5001 S1 2010 (3) Date 1/7 6/7 11/7 (4 @ $106) $424 LIFO Purchases (5 @ $95) $475

Self-Study Solutions

Week 6

Sales

Balance (5 @ $95) $475 $190

(3 @ $95)

$285 (2 @ $95) (2 @ $95)} (4 @ $106)}

$614

14/7

(3 @ $106)

$318 (2 @ $95)} (1 @ $106)} $296

21/7

(3 @ $112)

$336

(2 @ $95)} (1 @ $106)} (3 @ $112)} $632

27/7

(3 @ $112)} (1 @ $106)} +Ending inventory $190 $442 (2 @ $95) $190

(b)

The highest ending inventory is $224 under the FIFO method.

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