Professional Documents
Culture Documents
Problem 9.1
1. Cost
of
goods
sold
= 865 000 @ $5 = $4 325 000
under
perpetual
inventory
system
$
Inventory
Accounts payable
Credit purchases during the period
120 000
Accounts receivable
Sales revenue
Sales on credit during the period
210 000
140 000
200
Operating expenses
$
120 000
210 000
140 000
200
35 000
Cash
Expenses paid in cash
35 000
175 200
Sales revenue
Profit and loss summary
Closing entry
210 000
140 000
200
35 000
210 000
34 800
34 800
Frog Ltd
General journal
b Periodic inventory
Purchase expense
Accounts payable
Credit purchases during the period
Accounts receivable
Sales revenue
Sales on credit during the period
Operating expenses
Cash
Expenses paid in cash
$
120 000
120 000
210 000
210 000
35 000
35 000
195 000
19 800
210 000
120 000
35 000
40 000
229 800
34 800
34 800
2. a. Perpetual inventory
Frog Ltd
Income Statement for year ended 30 June 2012
$
Sales
Less:
140 000
200
$
210 000
140 200
69 800
35 000
34 800
b. Periodic inventory
Frog Ltd
Income Statement for year ended 30 June 2012
$
Sales
Less:
$
210 000
40 000
120 000
160 000
19 800
140 200
69 800
35 000
34 800
Problem 9.6
1. a. Perpetual FIFO
COGS = 60 x $5 + (50 x $5 + 70 x $6) + (10 x $6 + 80 x $7) = $1590
Closing inventory = 30 x $7 + 100 x $8 = $1010
b. Perpetual LIFO
COGS = 60 x $6 + (110 x $7 + 10 x $6) + 90 x $8 = $1910
Closing inventory = 110 x $5 + 10 x $6 + 10 x $8 = $690
2 Only Closing inventory is adjusted the net realisable value is designed to prevent
companies overstating their asset values. Therefore under both FIFO and LIFO, Closing
inventory should be $650 (130 x $5). FIFO Closing inventory should be reduced by $360,
LIFO by $40.
With the reducing balance method expense is larger in the earlier years than in the later years
so profit is reduced by larger amounts in the early years of the assets life.
With the units-of-production method the expense depends on each years volume of
production, so the reduction in profit varies according to the amount of production achieved.
DQ10.14
You may get some idea as to the age of the assets, how worn-out they are, and whether many of
the assets will need to be replaced soon. It is possible to have a better understanding of changes
in the productive capacity of the firm. (Depreciable) assets are usually much more important to
the company, and in evaluating it, than are things like prepaid expenses.
DQ10.16
Depreciation has been defined as a process whereby the decline in service potential of
an asset through wear, tear and obsolescence is progressively brought to account as a periodic
charge against revenue.
In each period in which the asset is used to generate revenue, a portion of its cost is
matched against that revenue, i.e., it is treated as depreciation expense. Cost is taken as the
basis of depreciation numbers on the assumption that the acquisition cost of an asset reflects its
value at the time of acquisition.
Depreciation, as well as being an allocation of cost over the useful life of the asset, also
reflects the decline in the value (= service potential) of the asset over its useful life. Value
here implies value-in-use, i.e., the asset will be used in the ongoing operations of the entity
viewed as a going concern, i.e., one, which is expected to continue its operations into the
future. According to this view, if an asset is acquired to be used its exchange value (market
selling price) is irrelevant by definition the asset was not acquired to be re-sold.
Also, until the asset is sold then there is no transaction that can provide objective
information as to its exchange value. On the other hand, the residual value of the asset is not
depreciated. By definition, residual value refers to the value of the asset at the end of its
useful life. At this stage the asset will be disposed of and its carrying amount is matched against
any revenue from disposal. At this point it is its value in exchange rather than value in use
which is relevant; so that it is appropriate that some portion of the cost of the asset remain
unallocated so that it can be matched against revenue from disposal (if any).
Problem 10.2
1 a. Van $20,000 + $5,000 + $1,000 = $26,000 (Costs of making ready for use).
b. Cost not market value, i.e. $3,200
2 a. $26,000
(26,000 800) 4
= $6,300.
b. Rollers will last for 2 years.
Year 1, 9/12 x 50% x 3,200
= 1,200.
c. Three year licence but purchased on 1 February, therefore 11/36 amortisation
$1,375 is the amortisation expense.
3. Property, Plant and Equipment
Property, Plant and Equipment
Intangible Assets
5
Problem 10.4
1.
Total cost of the asset
2.
3.
Problem 10.15
Machine 1
Dr Cash
Dr Accumulated Depreciation
Dr Loss on Sale
Cr Machine
10,000
15,000
15,000
40,000
Machine 2
Dr Cash
Dr Accounts Receivable
Dr Loss on Sale
Cr Machine
20,000
10,000
32,500
62,500
Machine 3
Dr Machine Write-off
Cr Machine
100,000
100,000