AFAB233 Financial Accounting and Reporting 2

Semester 1 2020/2021

TUTORIAL 1 : INVENTORY

Question 1

The following information has been extracted from the records of Earth Bhd about one of its
products. The company’s financial year ends on 30 September 2020.

No. of Unit cost Total cost (RM)

units (RM)
1/10/2019 Beginning balance 1,600 14.00 22,400
6/10/2019 Purchased 600 14.10 8,460
5/11/2019 Sold @ RM24 per unit 2,000
19/12/2019 Purchased 2,200 14.70 32,340
24/12/2019 Purchase returns 160 14.70 2,352
10/1/2020 Sold @ RM24.20 per unit 1,400
22/3/2020 Purchased 16,800 15.00 252,000
30/4/2020 Sold @ RM26.50 per unit 3,600
4/5/2020 Sales return @ RM26.50 per unit 40
4/6/2020 Sold @ RM27.00 per unit 7,000
6/8/2020 Purchased 1,000 16.00 16,000
27/9/2020 Sold @ RM30.00 per unit 6,200

Required:

(a) Calculate the cost of inventory using the first-in first-out and the weighted average cost
methods.
(b) Prepare an extract of the Statement of Profit or Loss to determine the gross profit under
each of the two methods.
(c) What is the difference and the effect of assigning cost using these methods?

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Question 2
As at 30 June 2020, the inventory balance of Land Bhd was RM194,400.

On 24 June 2020, the company recorded a RM1,320 credit sale of goods costing RM1,200. These
goods were sold on FOB destination terms and were in transit at 30 June 2020, were included in
the physical count.

Inventory on hand at 30 June 2020 (determined via physical count) had a cost of RM195,600 and
a net realizable value of RM194,740.

Required:

Prepare any adjusting journal entries required on 30 June 2020.

Question 3
Green Bhd wholesales bicycles. It uses the perpetual inventory method and allocates cost to
inventory on a first-in, first-out basis. The company’s reporting period ends on 31 March. At 1
March 2020, inventory on hand consisted of 350 bicycles at RM82 each and 43 bicycles at RM85
each. During the month ended 31 March 2020, the following inventory transactions took place
(all purchase and sales transactions are on credit):

March 1 Sold 300 bicycles for RM120 each.

3 Five bicycles were returned by a customer. They had originally cost RM82 each and
were sold for RM120 each.
9 Purchased 55 bicycles at RM91 each.
10 Purchased 76 bicycles at RM96 each.
15 Sold 86 bicycles for RM135 each.
17 Returned one damaged bicycle to the supplier. This bicycle had been purchased
on 9 March.
22 Sold 60 bicycles for RM125 each.
26 Purchased 72 bicycles at RM98 each.
29 Two bicycles, sold on 22 March, were returned by a customer. The bicycles were
badly damaged so it was decided to write them off. They had originally cost RM91
each.
Required:
(a) Calculate the cost of inventory on hand at 31 March 2020 and the cost of sales for the month
of March.
(b) Calculate the gross profit on sales for the month of March 2020.
(c) MFRS 102 requires inventories to be measured at the lower of cost and net realisable value.
Identify three reasons why the net realisable value of the bicycles on hand at 31 March 2020
may be below their cost.
(d) If on 31 March 2020, net realisable value of the bicycles was RM92, what action should Green
Bhd take?

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