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Australian

School of Business
ACCT1501 Accounting and Financial Management 1A
Session 1 2013
TUTORIAL WEEK 9 Solutions to Tutorial Questions
Tutorial Questions
v DQ: 9.8; Problems 9.3, 9.10, 9.16; Problems 10.12, 10.16

Discussion Question
9.8
FIFO, weighted average and LIFO are assumptions made about the order in which units of
inventory flow through the business. FIFO assumes that the first items acquired are the first ones
sold and, therefore any ending inventory on hand consists of the most recently acquired units.
Thus the older costs will appear in cost of goods sold and the more recent costs on the balance
sheet. Weighted average assumes that ending inventory and cost of goods sold are composed of
a mixture of old and new units. LIFO assumes the opposite of FIFO. Recent costs will appear in
cost of goods sold and the older costs in the balance sheet.
The three methods will give similar profit figures if inventory prices are fairly constant. They
would give identical profit figures if cost prices of opening inventory and purchases remain
unchanged throughout the financial period.

Problem 9.3
1

Bragg Ltd
General journal

a Perpetual inventory
Inventory
Accounts payable
Credit purchases during the period

$
110 000

110 000

Accounts receivable
Sales revenue
Sales on credit during the period
Cost of goods sold expense
Inventory
Cost of goods sold expense: 50% mark-up 180 000
x 100/150 = $120 000

180 000

Inventory shortage expense


Inventory
Shortage: record indicates inventory should be
$30 000 + $110 000 $120 000 = $20 000 but only
$18 600 is on hand

1 400

Operating expenses
Cash

180 000
120 000
120 000

1 400

35 000
35 000

Expenses paid in cash


Profit and loss summary
Cost of goods sold expense
Inventory shortage expense
Operating expenses
Closing entry
Sales revenue
Profit and loss summary
Closing entry
Profit and loss summary
Retained profits
Transfer of net profit

156 400
120 000
1 400
35 000
180 000
180 000
23 600
23 600

Bragg Ltd
General journal
b Periodic inventory

$
110 000

Purchase expense
Accounts payable
Credit purchases during the period

110 000

Accounts receivable
Sales revenue
Sales on credit during the period

180 000
180 000

Operating expenses
Cash
Expenses paid in cash

35 000
35 000

Profit and loss summary


Purchase expense
Operating expenses
Inventory (1 July 2011)
Closing entry
Inventory (30 June 2012)
Sales revenue
Profit and loss summary
Closing entry
Profit and loss summary
Retained profits
Transfer of net profit

2 a

175 000
110 000
35 000
30 000
18 600
180 000
198 600
23 600
23 600

Perpetual inventory
Bragg Ltd
Income Statement for year ended 30 June 2012
$

Sales
Less:

Cost of goods sold


Inventory shortage
Gross profit
Less: Operating expenses
Net profit

120 000
1 400

$
180 000
121 400
58 600
35 000
23 600

b Periodic inventory
Bragg Ltd
Income Statement for year ended 30 June 2012
$
Sales
Less:

Cost of goods sold


Inventory 1 July 2011
Purchases
Available for sale
Less: Inventory 30 June 2012
Cost of goods sold
Gross profit
Less: Operating expenses
Net profit

$
180 000

30 000
110 000
140 000
18 600
121 400
58 600
35 000
23 600

Problem 9.10
1
FIFO
Date
1-July
8-July
12-July
13-July

#
300
500

In
$ per
6.00
5.00

$
1 800.00

200

4.00

50
150

6.00
6.00

300.00
900.00

100
300
100

6.00
5.00
5.00

600.00
1 500.00
500.00

100
50

5.00
4.00

500.00
200.00
4 500.00

2 500.00

20-July
22-July
24-July

Out
$ per

800.00

29-July

Sales

200 @ $7
400 @ $6
100 @ $5.50
150 @ $5

#
300
250
100
100
500

Balance
$ per
$
6.00
1 800.00
6.00
1 500.00
6.00
600.00
6.00
600.00
5.00
2 500.00

200
100
100
200

5.00
5.00
5.00
4.00

1 000.00
500.0
500.00
800.00

150

4.00

600.00

1 400
2 400
550
750

5 100
4 500
600

Less cost of goods sold


Gross profit
2
Date

1-July
8-July
12-July
13-July

300

In
$ per
6.00

LIFO
Out
$ per

1 800.00
50
150

6.00
6.00

300.00
900.00

20-July

400

5.00

2 000.00

22-July
24-July

100

5.00

500.00

150

4.00

600.00

500

200

5.00

4.00

29-July

2 500.00

800.00

4 300.00
Sales
Less cost of goods sold
Gross profit

$
5 100
4 300
800

Balance
$ per

300
250
100
100

6.00
6.00
6.00
6.00

1 800.00
1 500.00
600.00
600.00

500
100
100
100
100
200
100
50

5.00
6.00
5.00
6.00
6.00
4.00
6.00
4.00

2 500.00
600.00
500.00
600.00
600.00
800.00
600.00
200.00

Problem 9.16
Methods used to adjust profits include: stock values would be increased artificially, cost of
goods sold decreased and gross profit increased.
Goods available for sale (i.e. opening inventory + purchases) are split between COGS
and closing inventory depending on whether inventory has been sold or not. Increasing
the value of inventory reduces cost of goods sold and thereby raises profit.
The tweaking usually involved overstating of number of items in inventory or the
dollar value of specific items.

Problem 10.12
The cost and depreciable amount of the additional equipment purchased is calculated as
follows:
Price
Less:

Less:

$
120 000
30 000
90 000
7 500
2 500
100 000
3 125
96 875

Trade discount
Freight charges
Installation and testing
Cost
Salvage value
Depreciable amount

Depreciation for the year ended 30/6/12 is calculated as follows:


1 Reducing balance:
6
$100 000 50%
= $25 000
12
2 Straight-line:
1
6
$96 875
= $9687.5
5 12
3 Units-of-production method:
70,000
$96 875
= $8750
775,000

Problem 10.16
1 Dr Cash
Dr Accumulated depreciation
Cr
Delivery truck

$8,000
$39,000
$47,000

2 Dr Cash
Dr Accumulated depreciation
Cr
Gain on sale
Cr
Delivery truck

$9,000
$39,000
$1,000
$47,000

3 Dr Cash
Dr Accumulated depreciation
Dr Loss on sale
Cr
Delivery truck

$7,100
$39,000
$900
$47,000