Inventories and Biological Assets – Discussion

Inventories
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Description
· An asset
· So called “commodities” or Tangible Non-living things
· Used for trading purposes
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Under servicing there is an inventory yet it is treated as a supply and the treatment is prepaid expenses or expense immediately
whichever is applicable
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Under merchandising, it is the essential factor to operate this kind of business. Under reporting of FS, it is treated solely as
merchandise inventory. All the items reported here are ready for sale which means under this kind of business the inventories are
already finished goods
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Under Manufacturing, the inventories are composed of 3 main types: the (1) raw materials (2) work in process (inventory which are not
yet done in the manufacturing process) (3) finished Goods. But as to reporting, we include supplies as inventory
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Measurement
The inventories are initially recorded at cost, and these costs are composing of the following
1. Purchase cost
These includes the following
· Purchase price – which you already encountered in your previous classes such as your basic accounting. Ito un halaga mo, este un
halaga or equivalent value in exchange for another asset or specifically cash. Example the price of one (1) 250ml bottled water is 10
pesos. The 10 pesos is part of the cost of the good.
· Import duties and other taxes – these are the taxes that paid to the government such as the tariff or custom duties when you import
goods or material from other countries. Another is VAT which is a kind of a transfer tax which is additional cost to the item when you
bought it.
· Transport, handling and any other cost attributable – these are the freight in, storage cost or cost of moving the goods
· Less the discount and any allowances
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2. Cost of Conversion (applies only to manufacturing businesses only)
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These are the cost that are essential to make the inputs into a finished goods in order to sell
The manufacturing process includes the following cost (under cost accounting subject)
1. Prime cost includes Direct materials and Direct Labor
2. Conversion cost includes Direct Labor and Overhead
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Under Inventories concept, cost of conversions are composing of three items
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· Raw/Direct Materials – Raw Materials are the goods which are used to create new/improve product. Example: wood to make a table,
ink to make a ball pen, water to create juices, flour to make breads or pizza (miss nyo na ba, haha)
· Direct Labor– Human work/efforts (☹, jk haha) ito mismo un mga professional services done physically by a person. And these are
the cost capitalized in the inventories. It is the cost you know as salaries and wages.
· Overhead – these are the cost other than the direct labor and materials. Ito un mga small items na ndi physically nakikita at
nabibigyan ng appreciation. (oh for sure napa react ka. Chill haha) but truly, these are the items that are not directly visible in the
product but essential in the product such as (1) the rental fee paid for the owner in order to use the site for production (2) supervisory
cost paid or quality and assurance checker na titignan ang ang item if tama ang pagkakaproduce (3) cleaning and maintenance cost of
the site (if wala nito magiging madumio ang products and become hazardous in worst part and subsequently ndi fit to sell un items
diba?) But these are some items na still part of the cost of the product even if ndi sya nakikita. Kahit walang physical presence sa
product may value pa din. “indirect materials and indirect labor: are part of the overhead. Take note: “in” “indirect”
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- There are two types of overhead, fixed and variable
Fixed overhead - these are the cost na kahit dumami ang production or bumba aor tama lng or sakto, the cost will not change such as
the rental fee. If nagbabayad ka sa isang building do you think if dinamihan mo ang production, lalaki ba or bababa ang cost of rent
(same lng ang rental space area, no changes) – diba, it will not change, that’s why it is called fixed overhead. Kahit damihan pa ang
nagawa wala nmn mababago pa.
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Illustration: Monthly rental fee 20,000
No of unit produce: March 1,200 units; April 1,500 units; and May 900 units
Cost of rental Fee every month: March 20,000; April 20,000 and May 20,000
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Allocation are usually made on based on the number of units produced, “usually”
Cost of rental fee per unit
March = 20,000/1,200 = 16.67 pesos per unit
April = 20,000/1,500 = 13.33 pesos per unit
May = 20,000/900 = 22.22 pesos per unit
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Variable Overhead – It is parallel to the number of units produce. As the number of units produced increases, the cost of variable
overhead increases. The lesser the number the lesser the cost of overhead. For example: Supplies are an overhead cost, water,
electricity, gas etc.
-- Illustration
Cost of electicity per unit: 3 pesos per unit
No of unit produce: March 1,200 units; April 1,500 units; and May 900 units
Cost of electricity : March 3,600; April 4,500 and May 2,700
3. Other Costs incurred which are essential to the inventories in order to acquire, to have custody, and ready for sale.
· Abnormal Amounts – Waste materials, defective materials etc
· Storage
· Administrative overhead
· Selling cost
Standard cost (in the comment section)
Net Realizable Value
Net means there is something deducted to the cost. There are only three permanent things in the world: Tax, Death and Change. And
we can’t stop the changes that are coming right to us (☹ , hahah) and so as the inventories. All things are susceptible to changes that
why every end of the reporting period or whenever necessary we need to measure the changes such as the net realizable value or the
NRV. This is a measurement where you can value the item in a specific reporting period. Ano na ba ang nararapat ng halaga neto,
gaano n lng ba ito mapapagbenta sapat na ba ang measurement?
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The inventories are measured subsequently at Lower of cost or NRV (LCNRV)
NRV are measured by the factors stated in the book. Those are the determinants on how can you measure the items. Example: A
Nokia Phone unit on way back time on its glorious days where it is very pricey. But as the android and Apple series came. The prices of
Nokia products are fall down even it is lower than the cost. The changes or the downfall of NRV versus the cost is term as loss on
inventory writedown.
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It is term LCNRV because you will choose whichever of the cost and NRV is lower. And the inventories can be treated as a whole,
group or individually
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BIOLOGICAL ASSETS
-an asset – the concept applies such as it resulted from past events, have future economic benefits
-similar to inventories yet inventories are reported under current assets while Bio Assets are non-current due to its life of more than a
year. Also, Bio assets are living animals or plants. That’s why it is term as Bio. Bio means life.
-It has capability to grow, degenerate, reproduce and create agricultural produce.
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It is like inventories why? Even it is a living animals some are used to profit making (sadly, yes) but some are for procreation like some
are breading love birds and the offspring when it reaches a proper growth it can be now ready for sale to be pet by other or paired up
with another for creation. Another which is very common. The livestock or piggery wherein baby pigs are taken care of and make them
grow and until such age will be for sale either alive or the other way around which is for food purposes. How bout for living plants or
trees? When they grow they will be cut off and be an inventory (we are not yet talking about the the fruits or vegetables that has been
produce) We are talking here about the physical plants such as flowers, bonsai, succulents etc. wherein the actual physical plant are
cut off to be sold in pieces or individually. And these are the consumables
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What is bearer means? It means it can develop to produce an offspring or agricultural produce.
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Some of your answer is that the Biological assets are reported as property plant and equipment. Yes, but only the Bearer plants. Why?
It has one purpose, there are solely to produce agricultural produce and when it degenerates or end of its useful life, they are being
written off or scrapped. Unlike bearer animals when they reach near of its useful life some are already being traded as inventory. But
still reported as Biological assets.
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Initial measurement of Bio- assets are at Fair value less cost to sell and = the agricultural produce or the harvest (ung paghiwalay sa
mismong pinag ugatan or origin nung na produce such as fruits, flowers etc. ) are also measured at fair value less cost to sell which is
similar to Inventories measurement which is the cost at that date. Take note: the measurement takes place by the time it is removed or
detach and not the time it is ready for detachment or sale but still attached from the main source of production.
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How to measure fair value?
The basis will be the net market values and historical costs on which how does the society values such bio-assets for equivalent prices
on it current state of quality and quantity
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Subsequent measurement is still at Fair value less cost to sell in which the fair value will be change according to the “physical
change/growth change” and the “price change” in which they are separately identified and reported.
For example:
Physical change: on 2020 the horse is currently age 1 year old; then on 2021 which is already 2 years old
Price change: the amount itself is 1 year old on 2020 vs the amount of 2021 of 1 year old:
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Illustration
Fair Value of 1 year old Horse on Dec 31,2020 = 12,000
Fair Value of 1 year old Horse on Dec 31,2021 = 14,000
Fair Value of 2 year old Horse on Dec 31,2021 = 21,000
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Price Change
Fair Value of 1 year old Horse on Dec 31,2021 = 14,000
Fair Value of 1 year old Horse on Dec 31,2020 = (12,000)
Price change for the horse for the year 2021 = 2,000 (increase)
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Physical change
Fair Value of 2 year old Horse on Dec 31,2021 = 21,000
Fair Value of 1 year old Horse on Dec 31,2021 = (14,000)
Physical change for the horse the year 2021 = 7,000 (increase)
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Total Price Change = 2,000
Total Physical Change = 7,000
Net Gain on changes = 9,000
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Proforma entry
DR Biological assets-------------9,000
---CR Gain on change in Fair Value------------------9,000
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If Loss then we use change on fair value.
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Sir Pede naman na pong pagsamahin na lng parang ganto?
Fair Value of 2 year old Horse on Dec 31,2021 = 21,000
Fair Value of 1 year old Horse on Dec 31,2020 = 12,000
Net changes = 9,000
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If you will just find the net changes you can, but for proper reporting it is needed to report separately the breakdown. And some
questions on the board will ask for the price change only, physical change only or both.

Government Grant

Government – agency or group of persons who manage the country – can be national or municipality.
Grant – giving or allowing something
Government Grant – it is assistance or aid from the government.It can be cash or non-monetary aid/assistance.
Income -grant income “Account title”
This is not subject to taxation
GG related to Assets
Purchase, make or acquire a specific asset.
Example
An entity was granted by the govt of 40% assistance on the purchase of a building. The building to be acquired is amounting to
1,000,000. And to be depreciated on 10 year useful life basis.

a. Treated as a deferred income

Annual depreciation = 1,000,000/10 yrs
= 100,000
JE:
DR PPE 1,000,000
CR Cash 1,000,000
#
Govt Grant = 1,000,000 * 40%
= 400,000 /10yrs
= 40,000

JE:
DR Cash 400,000
CR Deferred income 400,000
Year-end Journal entries
DR Depr – PPE 100,000 - nominal account
CR Acc. Depr 100,000
#
DR Deferred Income 40,000
CR Grant Income 40,000 - Nominal Account
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Net Income/loss = 100,000 – 40,000
= 60,000 loss
b. Treated as a reduction asset
Net Amount of Assets is = 1,000,000 - 400,000
= 600,000 /10
Annual Depreciation = 60,000
JE:
DR PPE 600,000
CR Cash 600,000
#
Year-end adjusting entry
DR Depr. PPE 60,000
CR Acc. Depr 60,000
#
Net income or loss for the year
Net Loss = 60,000

GG related to Income

An assistance other than stated on the GG related to Assets

Security agency has received a government grant amounting to 2,000,000 which this agecy should trained personnel as a security
guard. The training of these personnel are in a 3 year period. And it can produce as much of 1,000 SG. The cost of training are as
follows
First year 300,000 3/16 = 18.75%
Second Year 500,000
Third year 800,000
Total 1,600,000

On the time we received of the grant

DR JE Cash 2,000,000
CR Deferred Income 2,000,000
#
First Year
DR Training Cost Expense 300,000
CR Cash 300,000
#
DR Deferred Income 375,000
CR Grant Income 375,000
2m * 3/16 or 18.75%
#
Government Grant Problems - Activity
Problem 1
The income for the year 2020 and 2021 has a total amount of 450,000 and 600,000 respectively before considering the government
grant and the depreciation. The entity received a grant from the government amounting to 2,000,000 on July 1, 2020 to acquire an
equipment amounting to 8,000,000. The said equipment was bought on October 1, 2020 and depreciable for 5 years
Required:
1. Prepare Journal entries from 2020 to 20201 under
a. deferred income
b. reduction to asset
2. Compute for the net income for the year 2020 and 2021 under the two methods
Problem 2
An environmental organization was entitled for the government grant amounting to 3,000,000 to acquire land for the preservation of
nature. The grant was received on June 15, 2020 and the land was acquired on March 31, 2021 amounting to 2,750,000
Required
1. Prepare journal entries
Problem 3

A medical facility was granted by the government to procure medical supplies for the community for enhancing the immune system of
the people. The grant is amounting to 4,500,000 and was received on February 29, 2020. The cost incurred in the process are as
follows

For year 2020 2,000,000

For Year 2021 4,000,000

Required
1. Prepare journal entries