Business School

ACCT1501 Accounting and Financial Management 1A

Session 1 2016

TUTORIAL WEEK 9 Solutions to Tutorial Questions

Textbook Ch. 9 Inventory
Discussion Question DQ 9.3
Problems P9.3 and P9.7
Case 9B*

Textbook Ch. 10 Non-Current Assets

Discussion Question DQ10.14
Problems P10.12, P10.17

DQ 9.3 Determining GOGS under perpetual and periodic inventory systems

Under the perpetual inventory system, there is continuous accounting for cost of goods sold and
inventory. In the accounting records every time there is a sale we recognise the related cost of sale
and decrease in inventory
In contrast, under the periodic inventory system there is no continuous record of cost of goods sold
and inventory. At the end of the accounting period, closing inventory is determined based on a
physical stock take. Cost of goods sold is calculated by adding purchases for the period to
opening inventory and then deducting closing inventory. Consider the following example:
Example
1 Jan.

Stock on hand of 10,000 units at $8 cost each = $80,000

12 Jan. Sale of 2,000 units

15 Jan. Purchase of 6,000 units at $8 cost each = $48,000
31 Jan. Stock on hand 13,000 units at $8 cost each = $104,000
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Perpetual inventory system:

COGS = 2,000 units x $8 each = $16,000
Inventory loss = 1,000 x $8 each = $8,000
We know there is an inventory loss because according to our records ending stock in units should be
10,000 2,000 + 6,000 = 14,000 units. But the stocktake has found only 13,000 units

Periodic inventory system:

COGS = opening + purchases stock =$80,000 + $48,000 $104,000 = $24,000
Any stock losses are subsumed into COGS. We would be unaware of the amount of stock losses
because the periodic inventory system does not produce this information.
Under either method is necessary to make an assumption regarding the flow of costs through the
business, for example, whether the first items acquired are the first ones sold or whether ending
inventory and cost of goods sold are composed of a mixture of old and new items.

Problem 9.3 Frog Ltd

1. a. Perpetual inventory system

General journal
$

Credit purchases of inventory during the period

Inventory
Accounts payable

120 000

Sales on credit during the period

Accounts receivable
Sales revenue

210 000

Cost of goods sold at 50% mark-up, 210 000 1.5 = $140 000
Cost of goods sold
Inventory

140 000

Shortage: records indicates inventory should be $20 000 but

$19 800 is on hand
Inventory shortage expense
Inventory
Expenses paid in cash
Operating expenses
Cash

120 000

210 000

140 000

200
200

35 000
35 000

Closing entries
Sales revenue
Profit and loss summary
Profit and loss summary
Cost of goods sold expense
Inventory shortage expense
Operating expenses
Profit and loss summary
Retained profits

210 000
210 000
175 200
140 000
200
35 000
34 800
34 800

1. b. Periodic inventory system

General journal
$

Transfer opening inventory to COGS***

COGS Opening inventory
Inventory

40 000

Credit purchases of inventory during the period

COGS - Purchases
Accounts payable

120 000

Recognise closing inventory***

Inventory
COGS Closing inventory

40 000

120 000

19 800

Sales on credit during the period

Accounts receivable
Sales revenue

210 000

Expenses paid in cash

Operating expenses
Cash

35 000

19 800
19 800

210 000

35 000

Closing entries
Sales revenue
COGS Closing inventory
Profit and loss summary
Profit and loss summary
COGS Purchases
Operating expenses
COGS Opening inventory
Profit and loss summary
Retained profits

210 000
19 800
229 800
195 000
120 000
35 000
40 000
34 800
34 800

*** The two journals for the opening and closing inventory are taken directly to profit and loss summary
in the textbook. Students should recall that under the periodic system there is no running record of the
inventory balance. The closing inventory has to be journalised as shown here.

2.

a.

Perpetual inventory
Frog Ltd
Income Statement for year ended 30 June 2016
$

Sales
Less:
Cost of goods sold
Inventory shortage
Gross profit
Less:
Operating expenses
Net profit

140 000
200

$
210 000
140 200
69 800
35 000
34 800

2. b. Periodic inventory

Frog Ltd
Income Statement for year ended 30 June 2016
$
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

$
210 000

40 000
120 000
160 000
19 800
140 200
69 800
35 000
34 800

Problem 9.7 Dizzy Lizzy

1. Calculation of COGS
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
Date

In
$

1.1.12

Balance

10.2.12

Purchase

14.4.12
9.5.12

24.7.12
21.10.12

12.11.12

80

Out
$

60
110

100

300

770

COGS
Purchase

480

COGS
Purchase

Balance

2,050

110

550

110

550

80

480

50

250

80

480

50

250

80

480

110

770

50

250

10

60

70

420

110

770

10

60

110

770

100

800

800

COGS

10

60

30

210

80

560

100

800

1,590

1,010

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
Date

In
$

1.1.12

Balance

10.2.12

Purchase

14.4.12
9.5.12

24.7.12
21.10.12

12.11.12

80

Out
$

60
110

100

360

770

COGS
Purchase

480

COGS
Purchase

Balance
110

550

110

550

80

480

110

550

20

120

110

550

20

120

110

770

770

110

550

10

60

10

60

110

550

10

60

100

800

110

550

10

60

10

80

90

2,050

110
800

COGS

720

1,910

690

Useful tip: calculating that the total cost of goods available for sale was $550 +$ 2,050 = $2600
allows checking that COGS + Closing Inventory equals $2600.
2. Net realisable value
Only closing inventory is adjusted the net realisable value is designed to prevent companies
overstating inventory.
Therefore under both FIFO and LIFO, Closing inventory should be $650 (130 x $5).
FIFO Closing inventory should be reduced by $360
LIFO Closing inventory should be reduced by $40.
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DQ 10.14 Depreciation expense and accumulated depreciation

Accumulated depreciation is a contra-asset. It shows the extent to which the cost of a
non-current asset has already been depreciated at period end. Accumulated depreciation is an
estimate of the extent to which the gross amount of depreciable assets (e.g. cost) have been used
up. It is more appropriate to recognise as a contra account given that accumulated depreciation is
an estimate.
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.

Problem 10.12 Yip Ltd

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

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

Trade discount of 25%

Freight charges
Installation and testing
Cost
Less:
Salvage value
Depreciable amount

Depreciation for the year ended 30 June 2016 is calculated as follows:

1 Reducing balance:
$100 000 50%

6
months
12

= $25 000

2 Straight-line:
$96 875 20%

6
months
12

= $9 687.5

3 Units-of-production method:
70,000
$96 875
= $8 750
775,000

Problem 10.17 Quick Express

1 Dr
Dr

Cash
Accumulated depreciation
Cr Delivery truck at cost

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

Gain/(Loss) on sale = proceeds less asset book value = $8,000 ($47,000 $39,000) = $Nil

2 Dr
Dr
Cr
Cr

Cash
Accumulated depreciation
Gain on sale
Delivery truck at cost

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

Gain/(Loss) on sale = proceeds less book value = $9,000 ($47,000 $39,000) = $1,000 gain

3 Dr
Dr
Dr

Cash
Accumulated depreciation
Loss on sale
Cr Delivery truck at cost

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

Gain/(Loss) on sale = proceeds less book value = $7,100 ($47,000 $39,000) = ($900) loss

Case 9B* Treasury Wine Estates

1.

Journal entries

DR Inventory write-down expense $160M

CR Inventory
$160M
$35M
DR Inventory disposal expense*
CR Accounts payable**
$35M
* This is an expense account that could be given a number of different names
** Assumes that this transaction is on credit

2.

Market effect

A write down in inventory is treated as an expense which reduces net profit for the period. This
unexpected decrease in profit is likely to lead to a drop in share price. The market may also have
a negative reaction to managements handling of the situation.
Companies that have overvalued inventory often end up failing.
Dick Smith Holdings Limited anybody?
http://www.smh.com.au/business/retail/dick-smith-float-looks-like-window-dressing-20160205gmmg88.html

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