Applying ifrs standards 4th edition picker solutions manual

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Solutions Manual to accompany

®

Applying IFRS Standards 4e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by Ruth Picker, revised for this edition by John Dunn

John Wiley & Sons, Ltd, 2016

Solutions Manual to accompany Applying IFRS Standards 4e

Chapter 9 – Inventories Discussion Questions 1.

Define ‘cost’ as applied to the valuation of inventory.

The cost of inventories is the aggregate of: • The costs of purchase • The costs of conversion • Other costs to bring the inventories to their present location and condition.

Discuss each type of cost with appropriate examples.

2.

What is meant by the term ‘net realisable value’? Is this the same as fair value? If not, why not?

Net realisable value is the net amount that an enterprise expects to realise from the sale of inventory in the ordinary course of business and is defined in IAS 2 paragraph 6 as: the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

As such, net realisable value is specific to an individual enterprise and is not necessarily equal to fair value less costs to sell. Fair value is defined as ‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’ (IAS 2, paragraph 6).

3.

In what circumstances must assumptions be made in order to assign a cost to inventory items when they are sold?

One of the major problems in accounting for inventory is assigning the cost of acquiring inventory between those items sold during the year and those items still on hand at the reporting date. Ideally, costs should be individually identified for each inventory item however, this is only practical for entities whose inventory consists of a small number of easily identifiable items such as art galleries or manufacturers of specialised equipment.

Where a specific cost cannot be identified because of the nature of the item sold then some method has to be adopted to estimate that cost. This process is known as “assigning” cost.

Most inventory items fall into this category, for example, identical items of food and clothing and bulk items like oil and minerals. How can you measure the cost of a tonne of wheat when it is extracted from a stockpile consisting of millions of tonnes acquired at different prices over the accounting period? There are many method of assigning a cost to inventory items sold but IAS 2 paragraph 25 restricts entities to a choice between two methods – FIFO and weighted average.

© John Wiley and Sons, Ltd, 2016

9.1

Chapter 9: Inventories

4.

Compare and contrast the impact on the reported profit and asset value for an accounting period of the first-in, first-out method and the weighted average method.

The key issue for discussion in this question is the relevance and reliability of financial information produced under each method.

FIFO values the asset at the latest price and includes the earliest purchases in inventory and thus in times of rising prices may defer losses to the next accounting period and may overstate assets.

Weighted average ‘smooths’ the impact of price rises across income and asset values but may mask problems with obsolescence.

5.

Why is the lower of cost and net realisable value rule used in the accounting standard? Is it permissible to revalue inventory upwards? If so, when?

Net realisable value is the net amount that an enterprise expects to realise from the sale of inventory in the ordinary course of business. Where net realisable value is lower than cost the inventory item must be written down.

The rationale for this measurement rule is stated in IAS 2 paragraph 28, ‘assets should not be carried in excess of amounts expected to be realised from their sale or use’.

Inventory cannot be revalued upwards unless there has been a previous write down. If the circumstances that previously caused inventories to be written down below cost change, or if a new assessment confirms that net realisable value has increased the amount of a previous write down can be reversed (subject to an upper limit of the original write down). This could occur if an item of inventory written down to net realisable value because of falling sales prices, is still on hand at the end of a subsequent period and its selling price has recovered.

Under no circumstances can inventory be valued beyond its original cost.

6.

What impact do the terms of trade have on the determination of the quantity and value of inventory on hand where goods are in transit at the end of the reporting period?

Accounting for goods in transit at end of reporting period will depend upon the terms of trade.

Where goods are purchased on an FOB shipping basis the goods belong to the purchaser from the time they are shipped, and should be included in inventory/accounts payable at reporting date.

If goods are purchased on FOB destination terms no adjustment will be required as the goods still legally belong to the supplier.

If goods are sold on FOB destination terms then they belong to the enterprise until they arrive at the customer’s premises. If the sale has been recorded in the current year it will need to be derecognised.

© John Wiley and Sons, Ltd, 2016

9.2

Solutions Manual to accompany Applying IFRS Standards 4e

Exercises Exercise 9.1

CONSIGNMENT OF INVENTORY

Arendal Ltd reported in a recent financial statement that approximately $12 million of merchandise was received on consignment. Should the company recognise this amount on its statement of financial position? Explain.

Under a consignment arrangement, an agent (the consignee) may agree to sell goods on behalf of the consignor on a commission basis. The transfer of goods to the consignee is not a legal sale/purchase transaction. Legal ownership remains with the consignor until the agent sells the goods to a third party. Steps must be taken to ensure that goods held on consignment are not included in the physical count. Equally, goods owned by the enterprise that are held by consignees must be added to the physical count. Thus, Arendal Ltd will not report the consignment merchandise as inventory on its statement of financial position.

Exercise 9.2

SELECTION OF COST ASSUMPTION

Under what circumstances would each of the following inventory cost methods be appropriate? (a) Specific identification (b) Last-in, first-out (c) Average cost (d) First-in, first-out (e) Retail inventory (a) Specific identification should always be used where it is possible to clearly identify the cost of the item sold. (b) Last-in-first-out – this method is prohibited under IAS 2. (c) Average cost is best used where prices are subject to considerable variation or have a consistent rising trend. Using the FIFO method in this situation means that inventory is always valued at the highest price. Additionally, average cost is particularly suited to inventory where homogenous products are mixed together, like iron ore or spring water. (d) First-in-first-out - many proponents of the FIFO method argue that this method best reflects the physical movement of inventory, particularly perishable goods or those subject to changes in fashion or rapid obsolescence. (e) Retail inventory is not a method of assigning cost but a method of measuring cost used by the retail industry where inventory comprises large numbers of rapidly changing items with similar margins where other methods of measuring cost are not practicable.

© John Wiley and Sons, Ltd, 2016

9.3

Chapter 9: Inventories

Exercise 9.3

DETERMINING INVENTORY COST AND COST OF GOODS SOLD (PERIODIC)

What was the cost of sales for the year ended 31 December 2013?

What is the cost of ending inventory using the weighted average costing method?

Correct answers to multiple choice questions are: 1.

(b)

See working A

2.

(a)

See Working B

Workings: A.

B.

Cost of Sales Opening inventory Purchases Purchase returns Goods available for sale Closing inventory Cost of Sales

25 000 160 000 (1 400) 183 600 35 000 148 600

Weighted average cost Opening inventory Purchases Total cost of inventory ÷ total units = Cost per unit Closing inventory

$ 250 1 734 $1 984 79 $25.00 $625.00

Exercise 9.4

(240 + 1 014 + 480)

(rounded to nearest $) (25 units x $25.00)

ASSIGNMENT OF COST (PERIODIC AND PERPETUAL)

1. If Malmo Ltd uses the perpetual inventory system with the moving average cost flow method, the 18 April sale would be costed at what unit cost?

2. If Malmo Ltd uses the periodic inventory system with the FIFO cost flow method, what would be the cost of sales for April?

3. If Malmo Ltd uses the perpetual inventory system with the FIFO cost flow method, the 21 April sale return (relating to the 18 April sale) would be costed at what unit cost?

4. If Malmo Ltd uses the periodic method with the weighted average cost flow method, what would be the value of closing inventory at 30 April 2011? (Round average cost to the nearest cent.)

Correct answers to the multiple choice questions are: 1.

(c)

This is the alternative answer which is mathematically correct as per the workings below.

Workings for Question 1

© John Wiley and Sons, Ltd, 2016

9.4

Solutions Manual to accompany Applying IFRS Standards 4e

Date Apr 01 04 07 10 13 18 21 29

No.

Purchases Unit Total Cost

90 100

$8.40 $8.60

$756.00 $860.00

(20)

$8.60

($172.00)

170 2.

1 444.00

No.

Sales Unit Cost

Total

50

8.46

423.00

70 (5) 40 155

8.44 8.44 8.44

590.80 (42.20) 337.60 1 309.20

No. 20 110 210 160 140 70 75 35

Balance Unit Total Cost $8.00 $160.00 8.33 916.00 8.46 1 776.00 8.46 1 353.00 8.44 1 181.00 8.44 590.20 8.44 623.40 8.44 285.00

(a)

The FIFO method of assigning cost assumes that the earliest purchases are sold first meaning that the closing inventory is valued at the latest purchase price, which in this question is $8.60. Under the periodic system, the cost of goods sold expense is assumed to be equal to the difference between the total value of goods available for sale and the total value of goods still on hand.

Workings for Question 2 Cost of Sales Opening inventory Purchases (net of returns) Goods available for sale Closing Inventory* Cost of Sales

160.00 1 444.00 1 604.00 301.00 $1 303.00

* 35 units x 8.60 (latest purchase price)

3.

(b)

The first-in, first-out method also assumes that the last goods sold are the first goods returned. Thus, the five items returned would be costed at the last price of $8.60. This assures that inventory is always valued at the lasted purchase price.

Workings for Question 3

No.

Purchases Unit Total Cost

Apr 01 04

90

$8.40

$756.00

07

100

$8.60

$860.00

Date

10 13 18

(20)

$8.60

No.

Sales Unit Cost

Total

20 30

8.00 8.40

160.00 252.00

60 10

8.40 8.60

504.80 86.00

($172.00)

© John Wiley and Sons, Ltd, 2016

No. 20 20 90 20 90 100 60 100 60 80 70

Balance Unit Total Cost $8.00 $160.00 8.00 160.00 8.40 756.00 8.00 160.00 8.40 756.00 8.60 860.00 8.40 504.00 8.60 860.00 8.40 504.00 8.60 688.00 8.60 602.00

9.5

Chapter 9: Inventories

21 29 170

4.

1 444.00

(5) 40 155

8.60 8.60

(43.00) 344.00 1 303.00

75 35

8.60 8.60

645.00 301.00

(a)

Under the periodic system the weighted average is calculated by dividing the total number of units available for sale during the year by the total cost of those units. This average cost is then used to value inventory on hand in order to calculate cost of goods sold.

Workings for Question 4 Weighted Average Unit Cost: Total cost =

Unit cost = = Closing inventory =

Opening inventory 160.00 Purchases (net of returns) 1 444.00 Goods available for sale 1 604.00 $1 604.00/190 units $8.44 $295.40 (35 x $8.44)

© John Wiley and Sons, Ltd, 2016

9.6

Solutions Manual to accompany Applying IFRS Standards 4e

Exercise 9.5

END-OF-PERIOD ADJUSTMENTS

1. Prepare any adjusting journal entries required on 30 June 2013.

2. Prepare the trading section of the statement of profit or loss and other comprehensive income for the year ended 30 June 2013.

Part 1 Workings: Reconciliation Inventory account balance Add goods in transit

$ 194 400 1 200 195 600 195 600

Physical count NRV Test Inventory at cost Inventory at net realisable value Write down required

195 600 194 740 860

Uppsala Ltd Journal entries Year ended 30 June 2013 30 June 2013 Sales Dr Accounts Receivable Cr (reverse sale incorrectly recorded in June)

1 320

Inventory Cost of Sales (amendment for goods in transit)

Dr Cr

1 200

Inventory write down expense Inventory (write down to net realisable value)

Dr Cr

860

1 320

1 200

860

Part 2

Date 2013 30/06 30/06

Details

30/06

Balance b/d

Balance b/d Cost of Sales GJ

INVENTORY ACCOUNT Ref $ Date 2013 194 400 30/06 1 200 30/06 195 600 195 600

Details

Ref

$

Inventory write down GJ Balance c/d

860 194 740 195 600

Note: the question requires students to complete the inventory account for the year but there is insufficient information for this to be done.

© John Wiley and Sons, Ltd, 2016

9.7

Chapter 9: Inventories

Part 3 UPPSALA LTD Statement of Comprehensive Income (Extract) for the year ended 30 June 2013 $ Sales revenue Less: Sales returns Net sales Less: Cost of Sales Gross profit

$ 630 450 6 410 624 040 467 440 156 600

Note: Inventory shortage and write down expenses would be shown as other expenses (selling).

Exercise 9.6

APPLYING THE LOWER OF COST AND NRV RULE

Calculate the value of inventory on hand at 30 June 2013 in accordance with the requirements of IAS 2.

(NRV = estimated selling price less cost of completion and disposal) Item

A1458 A1965 B6730 DO943 G8123 W2167

Qty

600 815 749 98 156 1 492

Cost per unit $ 2.30 3.40 7.34 1.23 3.56 6.12

Total Cost $ 1 380.00 2 771.00 5 498.66 120.54 555.36 9 131.04

NRV per unit $ 3.26 2.95 9.05 0.88 5.03 7.30

Total NRV

Lower

$ 1 956.00 2 404.25 6 778.45 86.24 784.68 10 891.60

Cost NRV Cost NRV Cost Cost

Adjust $ 366.75 34.30 -

Therefore, inventory on hand would be: Inventory (at cost) Inventory (at NRV) Total inventory

$16 565.06 2 490.49 $19 055.55

© John Wiley and Sons, Ltd, 2016

9.8

Solutions Manual to accompany Applying IFRS Standards 4e

Exercise 9.7

END-OF-REPORTING-PERIOD ADJUSTMENTS

Adjust and reconcile the inventory control ledger account balance to the physical account (adjusted as necessary).

Balance of inventory control account. $ Unadjusted balance 248 265 Purchase return not recorded (1 200) Damaged goods written off (595) Goods in transit 1 500 Error in posting May purchases 3 600 Adjusted balance (cost) 251 570 Reconcile to physical count

Physical count Goods in transit Less consignment stock Returned goods not included Adjusted count Control account balance

$ 256 100 1 500 (7 600) 1 570 251 570 251 570

© John Wiley and Sons, Ltd, 2016

9.9

Chapter 9: Inventories

Exercise 9.8

ALLOCATING COST (WEIGHTED AVERAGE), REPORTING GROSS PROFIT AND APPLYING THE NRV RULE

1. Calculate the cost of inventory on hand at 31 March 2014 and the cost of sales for the month of March. (Round the average unit cost to the nearest cent, and round the total cost amounts to the nearest dollar.)

No. units

Purchases Unit Total Cost Cost

No. units

COS Unit Cost

Total Cost

Date

Details

01/03

Inventory balance

01/03

Sales

300

82.33

24 699

03/03

Sales return

(5)

(82.33)

(412)

09/03

Purchases

55

91.00

10/03

Purchase

76

96.00

15/03

Sales

17/03

Purchase return

22/03

Sales

26/03

Purchase

29/03

No entry*

91.00

32355

93

82.33

7 656

98

82.33

8 068

5 005

153

85.44

13 073

7 296

229

88.95

20 369

143

88.95

12 719

142

88.93

12 628

82

88.93

7 292

98.00

154

93.17

14 348

88.95

88.93

5 336

7 056

19 266

•

7 650

(91.00)

60 72

Balance Unit Total Cost Cost 82.33

86 (1)

No. unit s 393

37 273

154

14 348

The damaged goods returned would not be placed back into stock

2. Show the Inventory general ledger control account (in T-format) as it would appear at 31 March 2014.

Date 2014 01/03 31/03 30/03

Details

01/04

Balance b/d

Balance b/d Cost of Sales A/c payable

INVENTORY CONTROL Ref Date $ Details 2014 32 35530 17/03 A/c Payable GJ 412 31/03 Cost of Sales PJ 19 35790 31/03 Balance c/d 52 122 14 34862

© John Wiley and Sons, Ltd, 2016

Ref

$

GJ SJ

91 37 685 14 348 52 122

9.10

Solutions Manual to accompany Applying IFRS Standards 4e

3. Calculate the gross profit on sales for the month of March 2014.

Gross profit for the month of March 2014 Sales revenue Less sales returns Net sales revenue Less Cost of Sales* Gross profit

$55 110 850 54 260 37 091 $17 169

* The damaged bikes returned on 29 March would require the following journal entry to be recorded: 31 March 2014 Inventory losses and write downs Cost of Sales (damaged inventory written off)

Dr Cr

© John Wiley and Sons, Ltd, 2016

182 182

9.11

Chapter 9: Inventories

Exercise 9.9

1.

2.

3.

4.

5.

ALLOCATING COST (FIFO), REPORTING GROSS PROFIT AND APPLYING THE NRV RULE

Calculate the cost of inventory on hand at 31 March 2013 and the cost of sales for the month of March.

Show the Inventory general ledger control account (in T-format) as it would appear at 31 March 2013.

Calculate the gross profit on sales for the month of March 2013.

IAS 2 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 2013 may be below their cost.

If the net realisable value is below cost, what action should Stockholm Ltd take?

Part 1 – Calculate the cost of inventory on hand and cost of sales (FIFO)

No. units

Purchases Unit Total Cost Cost

No. units

COS Unit Cost

Total Cost

No. units 350 43

Balance Unit Total Cost Cost 82.00 28 700 85.00 3 655

Date 01/03

Details Inventory balance

01/03

Sales

300

82.00

24 600

50 43

82.00 85.00

4 100 3 655

03/03

Sales return

(5)

(82.00)

(410)

55

82.00

4 510

43

85.00

3 655

09/03

Purchases

55

91.00

5 005

55 43 55

82.00 85.00 91.00

4 510 3 655 5 005

10/03

Purchase

76

96.00

7 296

55 43 55 76

82.00 85.00 91.00 96.00

4 510 3 655 5 005 7 296

15/03

Sales

12 55 76

85.00 91.00 96.00

1 020 5 005 7 296

17/03

Purchase return

12

85.00

1 020

54 76

91.00 96.00

4 914 7 296

6 76

91.00 96.00

546 7 296

6 76 72

91.00 96.00 98.00

546 7 296 7 056

22/03

Sales

26/03

Purchase

29/03

No entry*

55 31

(1)

91.00

98.00

85.00 91.00

1 020 4 368

7 056

19 266

•

4 510 2 635

(91.00)

12 48 72

82.00 85.00

36 723

154

14 898

The damaged goods returned would not be placed back into stock

© John Wiley and Sons, Ltd, 2016

9.12

Solutions Manual to accompany Applying IFRS Standards 4e

Part 2 – Show the general ledger inventory account at 31 March 2013

Date 2013 01/03 31/03 30/03

Details

31/03

Balance b/d

INVENTORY CONTROL Ref Date $ Details 2013 32 355.30 17/03 A/c Payable GJ 410 31/03 Cost of Sales PJ 19 357.90 31/03 Balance c/d 52 12220 14 898.62

Balance b/d Cost of Sales A/c payable

Ref

$

GJ SJ

91 37 133 14 898 52 122

Part 3 Gross profit for the month of March 2013 Sales revenue Less sales returns Net sales revenue Less Cost of Sales* Gross profit

$55 110 850 54 260 36 541 $17 719

* The damaged bikes returned on 29 March would require the following journal entry to be recorded: 31 March 2013 Inventory losses and write downs Cost of Sales (damaged inventory written off)

Dr Cr

182 182

Part 4 Reasons why net realisable value may decline below cost included: • Inventories are damaged • Inventories are wholly or partially obsolete • Selling prices have declined below cost • A decision taken by the entity to sell products for the time being at a loss as part of an overall marketing strategy • Miscalculation or errors in purchasing.

Part 5 If the net realisable value of the bikes falls to $92.00 the inventory value should be reduced to $14 168 (154 bikes at $92.00 each) by passing the following entry: 31 March 2013 Inventory write-down Inventory (write down to net realisable value)

Dr Cr

© John Wiley and Sons, Ltd, 2016

730 730

9.13

Chapter 9: Inventories

Exercise 9.10 ASSIGNING COST AND END-OF-PERIOD ADJUSTMENTS 1. Calculate the number of units in inventory and the FIFO unit cost for baked beans and plain flour as at 30 June 2013 (show all workings).

2. Calculate the total dollar amount of the inventory for baked beans and plain flour, applying the lower of cost and net realisable rule on an item-by-item basis.

Prepare any necessary journal entries (show all workings).

Calculation of inventory (FIFO) Baked Beans Qty 350 200 470 (350) (200) (180) 50 340 14 326

Price 19.60 19.50 19.70 19.60 19.50 19.70 19.70 19.70 19.70 19.70

Value 6 860 3 900 9 259 (6 860) (3 900) (3 546) 985 6 698 (276) 6 422

Price 38.40 38.45 38.45 39.00 38 40 38.45 38.45 38.45 39.00

Damaged goods Goods in transit Physical count

Qty 625 150 200 240 (625) (150) (175) 25 240 265 (10) (240) 15

Value 24 000 5 768 7 690 9 360 (24 000) (5 768) (6 729) 961 9 360 10 321 (384) (9 360) 577

Baked Beans Plain Flour

Qty 326 15

Cost $6 421 577 $6 998

Opening balance Purchase 10 June Purchase 19 June Sales

Sales returns Perpetual balance Inventory shortage Physical count

Plain Flour Opening balance Purchase 03 June Purchase 15 June Purchase 29 June Sales

Perpetual balance

38.45 39.00 38.45

Part 2 Inventory NRV $9 454 577

Lower Cost Cost

Journal entries 30 June 2013 Inventory losses Inventory (Baked Beans) (write off missing inventory)

Dr Cr

275.80

Inventory losses Inventory (Plain Flour) (write off damaged cases)

Dr Cr

384.50

Accounts Payable Inventory (Plain Flour) (goods in transit – FOB destination)

Dr Cr

9 360.00

275.80

384.50

© John Wiley and Sons, Ltd, 2016

9 360.00

9.14

Solutions Manual to accompany Applying IFRS Standards 4e

Exercise 9.11

STATEMENT OF FINANCIAL POSITION CLASSIFICATION

Where, if at all, should the following items be classified on a statement of financial position? (a) Goods out on approval to customers (b) Goods in transit that were recently purchased FOB destination (c) Land held by a real estate firm for sale (d) Raw materials (e) Goods received on consignment (f) Stationery supplies (a)

As these goods are still owned by the entity they would be classified as inventory (current asset).

(b)

These goods still legally belong to the supplier and would not be recognised by the entity.

(c)

Key issue here is ownership – is the real estate firm merely offering the land for sale on behalf of the owner in which case the land would not be an asset of the real estate firm. Alternatively, if the land is owned by the real estate firm, and they sell land as part of their ordinary activities, the land would be recorded as inventory (current asset).

(d)

Raw materials would be included in inventory (current asset).

(e)

Goods received on consignment would not legally belong to the consignee and would not be recognised.

(f)

Stationery supplies would be classified as ‘other’ current assets unless the entity sells stationery or uses stationery as part of a production process in which case the supplies would be part of inventory.

Exercise 9.12

DISCLOSURES RELATING TO INVENTORY

What additional disclosures might be necessary to present the inventory fairly?

IAS 2, paragraph 36 requires Jokela Ltd to disclose the following information about inventory (if appropriate): • the accounting policies adopted in measuring inventories, including the cost formula used.

• The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity • The carrying amount of inventories carried at fair value less costs to sell • The amount of inventories recognised as an expense during the period • The amount of any write-down of inventories recognised as an expense in the period in accordance with paragraph 34 • The amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as an expense in accordance with paragraph 34 • The circumstance or events that led to the reversal of a write-down of inventories in accordance with paragraph 34 • The carrying amount of inventories pledged as security for liabilities.

© John Wiley and Sons, Ltd, 2016

9.15

Chapter 9: Inventories

Exercise 9.13

RECORDING INVENTORY TRANSACTIONS

Prepare journal entries for March 2014, using the pro-forma journals provided.

Journal entries for March 2014

Date 2014 01/03 15/03

Capital S Stvanger

23/03

Sales

Cash Receipts Journal Ref Cash Disc all

Account

Account

Chq

2014 08/03 14/03 21/03 30/03

Purchases B Askoy N Kurikka Salary expense

003 004 005 006

Date 2014 02/03 12/03 22/03

A/c rec

Other

16 000 1 176

24

1 300 18 476

__ 24

1 300 1 300

_____ 1 200

_____ 16 000

Cash Payments Journal Ref Other A/c pay

Purch

Cash

Disc.

Rec.

✓

Date

Sales

16 000

860 ✓ ✓ 1 400 1 400

4 800 2 000 _____ 6 800

Purchases Journal Account Terms B Askoy N Kurikka B Kimito

1 200

2/15, n/30 2/10, n/30 2/15, n/30

___ 860

860 4 704 1 960 1 400 8 924

Ref

Amount

✓ ✓ ✓

4 800 2 000 2 400

96 40 ___ 136

9 200

Date 2014 05/03 21/03

Account S Stavanger Alesund Ltd

Sales Journal Terms 2/10, n/30 2/10, n/30

Ref

Amount

✓ ✓

1 200 1 600 2 800

Date 2014 01/03

25/03

GENERAL JOURNAL Account Ref

Office equipment Capital (Office equipment contributed by owner) Accounts payable/B Kimito Purchase returns (Return of defective goods)

Dr

Cr

10 000 10 000 ✓

© John Wiley and Sons, Ltd, 2016

600 600

9.16

Solutions Manual to accompany Applying IFRS Standards 4e

Exercise 9.14 1.

2.

ASSIGNING COST (PERPETUAL)

Using this information, assume that Arvika uses the FIFO cost flow method and that the sales returns relate to the 20 August sales. The sales return should be costed back into inventory at what unit cost?

Assuming that Arvika uses the moving average cost flow method, the 12 August sales should be costed at what unit cost?

1.

(d)

See Working A

2.

(a)

See Working B

A.

FIFO assumes sales returns are valued at the latest purchase price.

August 20 sales = 10 x $4.20 + 20 x $4.30 + 10 x $4.60 = $172.00 August 28 return = 3 x $4.60 = $13.80

B.

Moving average calculations: 1 August Opening balance 7 August Purchase (10 x $4.20) 10 August Purchase (20 x $4.30)

Exercise 9.15 1.

2.

20 x $4.00 = 80.00 30 x $4.06 = 122. 00 (122/30 = $4.06) 50 x $4.16 = 208.00 (208/50 = $4.16)

END-OF-PERIOD ADJUSTMENTS

Based on the above information, calculate the amount that should appear for inventory on Brunnsberg Pty Ltd’s statement of financial position at 31 December 2013.

Prepare any journal entries necessary to adjust the Inventory general ledger account to the amount calculated in requirement 1.

Part 1 Inventory Balance at 31 December 2013 $ 441 000 38 000 51 000 $530 000

Physical count Consignment stock not owned by Brunnsberg Ltd Goods in transit still owned by Brunnsberg Ltd Goods in transit owned by customer Goods in transit still owned by supplier Goods in transit owned by Brunnsberg Ltd Adjusted inventory balance

(a) (b) (c) (d) (e)

Part 2 Brunnsberg Ltd Journal entries Year ended 31 December 2013 31 December 2013 Inventory Dr Cost of Sales Cr (goods in transit sold FOB destination) Inventory Dr Accounts Payable Cr (goods in transit purchased FOB shipping)

© John Wiley and Sons, Ltd, 2016

38 000 38 000

51 000 51 000

9.17

Chapter 9: Inventories

Exercise 9.16

1.

2.

ASSIGNING COST AND REPORTING GROSS PROFIT USING DIFFERENT COST METHODS

Calculate the cost of inventory on hand at 30 September 2013 and the cost of sales for the year ended 30 September 2013, using: (a) the FIFO cost method (b) the moving average cost method (round the average unit costs to the nearest cent, and round the total cost amounts to the nearest dollar).

Prepare the trading section of the statement of profit or loss and other comprehensive income for the year ended 30 September 2013, using: (a) the FIFO cost method (b) the moving average cost method.

© John Wiley and Sons, Ltd, 2016

9.18

Solutions Manual to accompany Applying IFRS Standards 4e

Part 1 – Calculate the cost of inventory on hand and cost of sales (a)

Date 01/10

Details Inventory balance

06/10

Purchases

05/11

Sales

FIFO Method

No. units

600

Purchases Unit Total Cost Cost

14.10

No. units

COS Unit Cost

Total Cost

8 460

1 600 400

14.00 14.10

22 400 5 640

No. units 1 600

Balance Unit Cost 14.00

Total Cost 22 400

1 600 600

14.00 14.10

22 400 8 460

200

14.10

2 820

19/12

Purchases

2 200

14.70

32 340

200 2 200

14.10 14.70

2 820 32 340

24/12

Purchase return

(160)

14.70

(2 352)

200

14.10

2 820

2 040

14.70

29 988

840

14.70

12 348

840

14.70

12 348

16 800

15.00

252 000

10/01

22/03

31/04

Sales

Purchases

200 1 200 16 800

15.00

14.10 14.70

2 820 17 640

252 000

Sales

840 2 760

14.70 15.00

12 348 41 400

14 040

15.00

210 600

04/05

Sales return

(40)

15.00

(600)

14 080

15.00

211 200

04/06

Sales

7 000

15.00

105 000

7 080

15.00

106 200

06/08

Purchases

7 080 1 000

15.00 16.00

106 200 16 000

27/09

Sales

880 1 000

15.00 16.00

13 200 16 000

1 000

16.00

16 000

6 200

15.00

306 448

© John Wiley and Sons, Ltd, 2016

93 000

299 648

9.19

Chapter 9: Inventories

Part 1 – Calculate the cost of inventory on hand and cost of sales (b)

Moving average cost method

No. units

Purchases Unit Total Cost Cost

No. units

COS Unit Cost

Total Cost

No. Units 1 600

Balance Unit Cost 14.00

Total Cost 22 400

2 200

14.02

30860

200

14 02

2820

Date 01/10

Details Inventory balance

06/10

Purchases

05/11

Sales

19/12

Purchases

2 200

14.35

32 340

2 400

14 65

35160

24/12

Purchase return

(160)

14.35

(2 352)

2 240

14.65

32 808

10/01

Sales

840

14.65

12 298

22/03

Purchases

17 640

14.98

264 298

31/04

Sales

3 600

14.98

53 928

14 040

14.98

210 370

04/05

Sales return

(40)

14.98

(599)

14 080

14.98

210 370

04/06

Sales

7 000

14.98

104 860

7 080

14.98

106 109

06/08

Purchases

8 080

15.11

122 109

27/09

Sales

1 880

15.11

28 427

600

14.10

8 460 2 000

1 400 16 800

1 000

15.00

16.00

14.02

14.65

28 040

20 510

252 000

16 000 6 200

15.11

306 448

93 682 300 421

Part 2 LILLEHAMMER TRADING Income statement (extract) For the year ended 31 December 2013 FIFO

Sales Revenue Less: Sales returns Net sales Less: Cost of sales Gross profit

$ 366 280 1 060 365 220 300 748 $ 64 472

© John Wiley and Sons, Ltd, 2016

Moving average $ 366 280 1 060 365 220 300 421 $ 64 799

9.20

Solutions Manual to accompany Applying IFRS Standards 4e

Exercise 9.17

END-OF-YEAR ADJUSTMENTS

Prepare any journal entries necessary on 30 June 2013 to correct any errors and to adjust inventory.

Workings Recorded Balance $ 221 020 2 400 -2 730 (6 300) 2 650 $217 200

Balance prior to adjustment Less consignment stock incorrectly counted Add goods in transit Add sale incorrectly recorded, FOB destination Add unrecorded purchase Less unrecorded sale Less damages goods write-off not processed

Physical Count $ 220200 (6 600) 1 200 2 400 $217 200

Johnkoping Fashions General Journal 2013 June 30 Sales Revenue Accounts receivable (Iceland Pty Ltd) (Correction – sale recorded in error)

Dr Cr

3 900

Inventory Cost of sales (Correction – sale recorded in error)

Dr Cr

2 400

Inventory Accounts payable (Finn Handbags) (Correction – unrecorded purchase)

Dr Cr

2 730

Accounts receivable (Viking Boutique) Sales revenue (Correction – unrecorded sale)

Dr Cr

9 600

Cost of sales Inventory (Correction – unrecorded sale)

Dr Cr

6 300

Inventory losses and write-downs Inventory (Damaged inventory written off)

Dr Cr

2 650

© John Wiley and Sons, Ltd, 2016

3 900

2 400

2 730

9 600

6 300

2 650

9.21

Chapter 9: Inventories

Exercise 9.18

ASSIGNMENT OF COST

For the inventory item (wall plaques), calculate October’s cost of sales expense and the cost of inventory on hand at 31 October 2013. Round all figures to the nearest cent.

Date 2012 01/10

Inventory record – Wall Plaques Purchases No. Unit Total Details units Cost Cost Inventory balance

04/10

Purchase

08/10

Sale

50

6.50

No. units

COS Unit Cost

Total Cost

325.00 45 15

6.40 6.50

288.00 97.50

No. units 45

Balance Unit Total Cost Cost 6.40 288.00

45 50

6.40 6.50

288.00 325.00

35

6.50

227.50

11/10

Purchase

70

6.60

462.00

35 70

6.50 6.60

227.50 462.00

14/10

Purchase return

(10)

6.60

(66.00)

35

6.50

227.50

19/10

Sale

24/10

Sale return

28/10

Purchase

40

6.70

35 35

6.50 6.60

227.50 231.00

25

6.60

165.00

(5)

6.60

(33.00)

30

6.60

165.00

268.00 989.00

Exercise 9.19

811.00

END-OF-REPORTING-PERIOD RECONCILIATION AND NRV

1. Reconcile the Inventory control ledger account balance with the physical count figure (adjust both figures as necessary).

2. Prepare any journal entries necessary to achieve the reconciliation.

Part 1

Calculate the balance of the inventory control account at 30 June 2013. $ Unadjusted balance 193 700 Damaged goods written off (220) Goods in transit 590 Adjust for stolen goods (160) Adjusted balance (cost) 193 910 Reconcile to physical count Physical count Posters not counted Goods in transit not counted Consignment stock Item incorrectly included Adjusted count Control account balance

$ 189 650 420 590 4 200 (950) 193 910 193 910

© John Wiley and Sons, Ltd, 2016

9.22

Solutions Manual to accompany Applying IFRS Standards 4e

Part 2 Journal details DATE 30/06/13

Exercise 9.20

DETAILS Inventory Accounts Payable Damaged inventory expense Inventory Inventory shortage expense Inventory

Dr 590

Cr 590

220 220 160 160

END-OF-REPORTING-PERIOD RECONCILIATION AND NRV

Explain what is meant by the term ‘net realisable value’ and detail the action C Bligh must take in respect to the wall barometers.

Net realisable value is defined by IAS 2 as “the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale”. In other words, it is an assessment of the future benefits embodied in the inventory item – what we can get from selling the item.

With the wall barometers, the expected benefits of selling the items $540 ($90 x 6) is less than the cost of $900 ($150 x 6) so the barometers must be written down to $540 to avoid overstating the value of the asset.

The journal entry required is: 30/6/13 Write-down to NRV expense Inventory

Exercise 9.21

1.

2.

Dr Cr

360 360

ALLOCATING COST (MOVING AVERAGE), ADJUSTMENTS AND WRITE-DOWNS TO NRV

END-OF-PERIOD

Prepare the perpetual inventory records for June 2014.

Prepare the inventory control and accounts payable control general ledger accounts (in T-format) for the month of June 2014.

Prepare any general journal entries necessary to correct the Inventory control general ledger account balance as at 30 June 2014. (Narrations are not required, but show all workings.) Do not adjust the perpetual inventory records prepared in Part A. 1. What does the term ‘net realisable value’ mean?

2. What sources of evidence could Mario examine to determine net realisable value?

3. What action should Mario take as at 30 June 2014 with respect to these net realisable values? Why?

© John Wiley and Sons, Ltd, 2016

9.23

Chapter 9: Inventories

Part A – Perpetual Inventory records Pool Filters DATE No. 01/06/14 01/06/14 05/06/14 09/06/14 18/06/14 20/06/14 23/06/14 24/06/14 28/06/14

PURCHASES Unit Cost Total

12 (3)

236.70 (236.70)

15

238.10

No.

SALES Unit Cost

Total

1 18 (2)

232.50 232.50 (232.50)

232.50 4 185.00 (465.00)

15 5

233.58 233.58

3 503.70 1 167.90

COGS:

$8624.10

SALES Unit Cost

Total

1

493.80

493.80

4

490.37

1 961.48

COGS:

$2 455.28

N o.

43 42 24 26 38 35 20 15 30

2 840.40 (710.10)

3 571.50 5 701.80

BALANCE Unit Cost Total 232.50 232.50 232.50 232.50 233.83 233.58 233.58 233.58 235.84

9 997.50 9 765.00 5 580.00 6 045.00 8 885.40 8 175.30 4 671.60 3 503.70 7 075.20

Pool Pumps DATE No. 01/06/14 01/06/14 04/06/14 17/06/14 18/06/14 24/06/14 26/06/14

2.

PURCHASES Unit Cost Total

5 3

476.10 491.30

2 380.50 1 473.90

2 (1)

491.30 (476.10)

982.60 (476.10) 4 360.90

N o.

No.

BALANCE Unit Cost Total

21 20 25 28 24 26 25

493.80 493.80 490.26 490.37 490.37 490.44 491.02

10 369.80 9 876.00 12 256.50 13 730.40 11 768.92 12 751.52 12 275.42

LEDGER ACCOUNTS

Date 2014 31/05 09/06 30/06

Details

01/07

Balance b/d

Date 2014 20/06 30/06

Details

Balance b/d C.O.S. A/c payable

Inventory Cash & disc Balance c/d

INVENTORY CONTROL Ref Date $ Details 2014 20 367.30 20/06 A/c payable GJ 465.00 26/06 A/c receivable PJ 11 248.90 30/06 C.O.S. ________ Balance c/d 32 081.20 19 350.62

ACCOUNTS PAYABLE CONTROL Ref Date $ Details 2014 GJ 710.10 31/05 Balance b/d CPJ 15 562.30 30/06 Inventory 2 950.10 19 222 .50 01/07 Balance b/d

© John Wiley and Sons, Ltd, 2016

Ref

$

GJ GJ SJ

710.10 476.10 11 544.38 19 350.62 32 081.20

Ref

$

PJ

7 973.60 11 248.90 _______ 19 222.50 2 950.10

9.24

Solutions Manual to accompany Applying IFRS Standards 4e

Part B General Journal Entries

30/06/14

Accounts payable Inventory (being removal of purchase not yet completed)

Dr Cr

3 571.50

Inventory shortage expense Inventory (being write off of missing pool filter)

Dr Cr

235.84

Sales returns and allowances Accounts receivable (being sales return)

Dr Cr

550.00

Inventory Cost of Sales (being return of one pool pump)

Dr Cr

490.37

3 571.50

235.84

550.00

490.37

Part C 1.

Net realisable value is defined by IAS 2 as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

2.

Mario should examine the following sources of evidence to determine net realisable value: • expected selling price • estimated costs of completion (if any), and • estimated selling costs.

These estimates take into consideration fluctuations of price or cost occurring after balance date to the extent that such events confirm conditions existing at balance date. The purpose for which inventory is held should be taken into accounts when reviewing net realisable values. For example, the net realisable value of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices. Estimated selling costs include all costs likely to be incurred in securing and filling customer orders such as advertising costs, sales personnel salaries and operating costs, and costs of storing and shipping finished goods.

3.

IAS 2 requires that inventory must be carried at the lower of cost and net realisable value and that this rule be applied to each individual inventory item. As the NRV of the pool filters is less than their average cost Mario should write down the pool filter stock. No adjustment is required to the cost of pool pumps.

© John Wiley and Sons, Ltd, 2016

9.25