“Experience is a hard teacher because she gives the test first, the lesson afterward.

”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

Lesson 4 for week beginning 30 August 2021

Topics:
1. Expenses and losses
2. Operating activities of a merchandising firm
3. Inventory valuation concept: Lower of cost and net realisable value
4. Recording inventory transactions using perpetual and periodic inventory systems
5. Inventory valuation methods – FIFO, weighted average and specific identification
6. Inventory impairment
7. Inventory errors
8. Inventory ratios

Learning objectives:
Refer to the course outline.

Readings:
1. STH Chapters 5 (Part A) and 6
2. SFRS(I) 1-2 on inventories

Textbook:
1. STH - Spiceland J. D., Thomas W., Herrmann D. (2019), “Financial Accounting”, 5th edition,
McGraw-Hill.

Discussion Questions

Question 1 STH Problem 5-2A (Applying online lesson 2.1 in recording transactions related to
credit sales and contra revenue)

21S1 AC1103 Lesson 4 Discussion Questions 1

 “Experience is a hard teacher because she gives the test first, the lesson afterward.”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

Required:

(a) Record the necessary transaction(s) for Outdoor Expo on each date.

(b) Show how Outdoor Expo would present net revenues in its income statement.

Question 2 (Applying online lesson 4.8 to analyze the impact of inventory errors on the
financial statements)

Webster Company reported net income of $31,000 and $35,000 for 20x4 and 20x5 respectively.
During the audit of Webster’s 20x5 financial statements, the auditors discovered the following
errors in the inventory accounts:

Reported Amount Correct Amount

$ $
Ending inventory, 20x4 15,000 14,000
Ending inventory, 20x5 18,000 16,000

Compute the correct net income for 20x4 and 20x5.

Question 3 (Applying online lessons 4.4 to 4.7 to account for inventories)

iCal Pte Ltd is a distributor of a premium brand of calculators to schools in Singapore, with its
financial year ends on 31 May. The company uses perpetual inventory system and first-in, first-
out (FIFO) method to manage its inventories.

At the beginning of June 2015, the company had 100 units of calculators at $20 each on hand.
There was no outstanding balance in the Accounts Receivable and Accounts Payable accounts as
at 1 June 2015. The following transactions occurred during the month of June 2015.

Date Transactions

June 2 Purchased 400 units of calculators at $22.68 each on credit from Calc World Limited
on terms 3/15, n/45.

June 2 Received an invoice of $380 from Ace Shipping Limited for the freight charges incurred
to bring in 400 units of calculators from Calc World.

June 4 Returned 20 defective calculators out of June 2 purchase to Calc World Limited and
the supplier sent a credit note.

21S1 AC1103 Lesson 4 Discussion Questions 2

 “Experience is a hard teacher because she gives the test first, the lesson afterward.”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

June 8 Paid Calc World Limited in full.

June 9 Purchased 300 units of calculators at $24.49 each on credit from Computation Inc on
terms 2/10, n/30.

June 10 Sold 375 units of calculators to Champion Secondary School on credit at an unit selling
price of $50, on terms 2/10, n/30. Hint: The unit cost of the purchased from Calc World
Limited on 2 June is $23.00.

June 10 Received an invoice of $50 from Reliable Transport Pte Ltd for the transportation
charges incurred to deliver 375 units of calculators to Champion Secondary School.

June 13 5 calculators returned by Champion Secondary School due to over-order and a credit
note was sent.

June 15 Received payment from Champion Secondary School.

June 17 Paid Computation Inc in full.

June 18 Sold 320 units of calculators to Success Secondary School on credit at an unit selling
price of $50, on terms 2/10, n/30. Hint: The unit cost of the units purchased from
Computational Inc on 9 June is $24.00.

June 25 Received payment from Success Secondary School.

June 27 10 defective calculators returned by Success Secondary School and a credit note was
sent. These 10 units had manufacturing defects and could be returned to the supplier.
Hint: Bring the 10 units back to inventory for subsequent return back to supplier.

June 29 Returned 10 damaged calculators out of June 9 purchase to Computation Inc and the
supplier sent a credit note.

June 30 Purchased 300 units of calculators at $26.80 each on credit from Calc World Limited
on terms 3/15, n/45, on terms FOB destination. The goods were shipped out on 30
June 2015 and arrived on 3 July 2015.

Required:

(a) Prepare the journal entries, without narrations, to record the transactions in June 2015. If
there is no journal entry for any transaction, explain the reason. Round the values to 2
decimal places.

21S1 AC1103 Lesson 4 Discussion Questions 3

 “Experience is a hard teacher because she gives the test first, the lesson afterward.”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

(b) Prepare the inventory ledger account for the month of June 2015. What is the ending
inventory as at 30 June 2015?

(c) Prepare an extract income statement for the month ended 30 June 2015 showing up to
the gross profit level.

Assume that the company uses periodic inventory system and first-in, first-out (FIFO) method to
manage its inventories.

(d) Prepare the journal entries, without narrations, to record the transactions in June 2015. If
there is no journal entry for any transaction, explain the reason. Round the values to 2
decimal places.

(e) At the end of June 2015, a physical inventory count was conducted and revealed that 88
units of calculators were in the warehouse. Prepare the adjusting entry to derive the cost
of goods sold.

Question 4 AC1103 S1 2019/20 Exam Question 1A (Applying online lessons 4.4 to 4.7 to
account for inventories)

CK Trading Pte Ltd (“CK”) is an exclusive distributor of Robo brand of household appliances in
the Asia Pacific region. On the last day of its financial year on 30 September 2019, CK did a
physical count of its inventories in its warehouses. Based on the physical count, CK established
that its inventory balance was $200,000, before considering the following transactions:

(i) Merchandises purchased on FOB shipping terms were shipped on 25 September 2019 and
arrived on 3 October 2019. The cost of merchandise was $8,500.

(ii) Merchandises sold to a customer on FOB shipping terms were shipped on 28 September
2019 and received by the customer on 4 October 2019. The sales price was $30,000 and
the cost of merchandise was $18,000.

(iii) Merchandises sold to a customer on FOB destination terms were shipped on 25 September
2019 and received by the customer on 30 September 2019. The sales price was $20,000
and the cost of merchandise was $12,000.

(iv) Merchandises at $5,000 cost were held on consignment for Robo AG.

21S1 AC1103 Lesson 4 Discussion Questions 4

 “Experience is a hard teacher because she gives the test first, the lesson afterward.”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

(v) Merchandises sold to a customer on FOB shipping terms were counted during the physical
inventory count on 30 September 2019 as the merchandises were packed and waiting for
pickup at the loading bay of the warehouse during the physical count. The merchandises
were picked up and shipped out on 30 September 2019 and received by the customer on
10 October 2019. The sales price was $25,000 and the cost of merchandise was $15,000.

Required

(a) Calculate the correct inventory balance as at 30 September 2019. Explain why each of the
above transaction was to be included or excluded in the correct inventory balance as at 30
September 2019.

(b) CK adopts SFRS(I) 1-2 on Inventories to account for its inventories. There is a drop in the
selling price of the merchandises and CK estimated that the net realisable value of its
inventory as at 30 September 2019 would be lower than its carrying amount by $10,000.
Prepare a journal entry, if any, and explain how CK should account for this.

Self-Practice Questions

Question 5 (Applying online lesson 4.3 to explain inventory valuation concepts)

FRS 2 on Inventories, paragraph 9 states that “Inventories shall be measured at the lower of cost
and net realisable value (NRV).” Why are firms allowed to write down the value of inventories
when the NRV of inventories is lower than the cost of inventories but not to report the gain when
the NRV of inventories is higher than the cost of inventories?

Question 6 (Applying online lesson 4.8 to analyze the impact of inventory errors on the
financial statements)

Faith Company reported net income of $200,000 and $250,000 for the 20x3 and 20x4
respectively. During the audit of Faith’s 20x4 financial statements, the auditors discovered the
following errors in the inventory accounts:

Reported Amount Correct Amount

$ $
Ending inventory, 20x3 108,000 109,200
Ending inventory, 20x4 120,000 118,500

Compute the correct net income for 20x3 and 20x4.

(Key answers: $201,200 and $247,300)

21S1 AC1103 Lesson 4 Discussion Questions 5

 “Experience is a hard teacher because she gives the test first, the lesson afterward.”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

Question 7 SNT* Exercise 8-6 (Applying online lessons 4.4 to 4.7 to account for inventories)

The Kwok Company’s inventory balance on December 31, 2018, was $165,000 (based on a
12/31/18 physical count) before considering the following transactions:

1. Goods shipped to Kwok f.o.b. destination on December 20, 2018, were received on January
4, 2019. The invoice cost was $30,000.

2. Goods shipped to Kwok f.o.b. shipping point on December 28, 2018, were received on
January 5, 2019. The invoice cost was $17,000.

3. Goods shipped from Kwok to a customer f.o.b. destination on December 27, 2018, were
received by the customer on January 3, 2019. The sales price was $40,000 and the
merchandise cost $22,000.

4. Goods shipped from Kwok to a customer f.o.b. destination on December 26, 2018, were
received by the customer on December 30, 2018. The sales price was $20,000 and the
merchandise cost $13,000.

5. Goods shipped from Kwok to a customer f.o.b. shipping point on December 28, 2018, were
received by the customer on January 4, 2019. The sales price was $25,000 and the
merchandise cost $12,000.

Required: Determine the correct inventory amount to be reported in Kwok’s 2018 balance
sheet.

(Key answer: $204,000)

*
Spiceland J. D., Nelson M., Thomas W (2018) “Intermediate Accounting”, 9th edition, McGraw-
Hill.

21S1 AC1103 Lesson 4 Discussion Questions 6

 “Experience is a hard teacher because she gives the test first, the lesson afterward.”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

Question 8 SNT* Exercise 8-8 (Applying online lessons 4.4 to 4.7 to account for inventories)

The Phoenix Corporation's fiscal year ends on December 31. Phoenix determines inventory
quantity by a physical count of inventory on hand at the close of business on December 31. The
company's controller has asked for your help in deciding if the following items should be included
in the year-end inventory count.

Required: Determine if each of the items below should be included or excluded from the
company's year-end inventory.

Item Included/Excluded
1. Merchandise held on consignment for Trout Creek Clothing.
Goods shipped f.o.b. destination on December 28 that arrived at
2.
the customer's location on January 4.
Goods purchased from a vendor shipped f.o.b. shipping point on
3.
December 26 that arrived on January 3.
Goods shipped f.o.b. shipping point on December 28 that arrived at
4.
the customer’s location on January 5.
5. Phoenix had merchandise on consignment at Lisa’s Markets, Inc.
Goods purchased from a vendor shipped f.o.b. destination on
6.
December 27 that arrived on January 3.
7. Freight charges on goods purchased in 3.

*
Spiceland J. D., Nelson M., Thomas W (2018) “Intermediate Accounting”, 9th edition, McGraw-
Hill.

(Key answers: Item 1. Excluded; Item 3. Included; Item 5. Included; Item 7. Included)

Question 9 STH Problem 6-1A Parts 1, 2 and 4 only (Applying online lessons 4.4 to 4.7 to
account for inventories)

(Key answers:
Specific identification: Ending inventory = $7,410, COGS = $12,730;
FIFO: Ending inventory = $7,430, COGS = $12,710;
Weighted-average (using periodic system): Ending inventory = $7,323.60, COGS = $12,816.30)

21S1 AC1103 Lesson 4 Discussion Questions 7

 “Experience is a hard teacher because she gives the test first, the lesson afterward.”
~ Vernon Law, American former baseball pitcher

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2021/2022

Question 10 STH Problem 6-3A Part 1 only (Applying online lessons 4.4 to 4.7 to account for
inventories)

(Key answers: July 11: Cr Cash $2,079; July 15: Dr Cash $5,800 July 30: Cr Cash $2,800)

Question 11 STH Problem 6-9A Parts 1 and 2 only (Applying online lessons 4.4 to 4.7 to account
for inventories)

(Key answer: Requirement 2 – COGS = $5,500)

Question 12 STH Problem 6-6A Parts 1 and 2 only (Applying online lessons 4.4 to 4.7 to account
for inventories)

(Key answers: Requirement 2 – Dr COGS $350, Cr Inventory $350)

Question 13 STH Problem 6-7A Parts 2 and 3 only (Applying online lessons 4.7 to analyze
inventory ratios)

(Key answers: Inventory turnover ratio = 16.9 times; Gross profit ratio = 0.58)

21S1 AC1103 Lesson 4 Discussion Questions 8