Question 1: Recording Inventory
Date
Transactions
(2023)
1 March
J.Watson contributed cash of $100,000 and inventory of $300,000 to
commence the operations of BomberWorld.
2 March
BomberWorld purchased inventory from AFL Wholesalers Ltd for
$80,000 on credit. Terms 3/10, n/60.
5 March
BomberWorld returned goods that had cost $5,000 to AFL Wholesalers
Ltd.
12 March BomberWorld paid the amount owing to AFL Wholesalers Ltd.
17 March BomberWorld sold inventory for cash $25,000 (cost price $18,000).
21 March Goods were returned to BomberWorld for a cash refund of $2000 (cost
price $1,500). The goods were not faulty.
22 March BomberWorld sold goods on credit for $40,000 (cost price $23,000).
Terms 5/7, n/30.
29 March BomberWorld received payment for the goods sold on 22 March.
31 March A physical stock take revealed inventory on hand of $330,000.
Required:
a) Record the above transactions and events in the general journal of
BomberWorld. Use the perpetual inventory method of recording inventory. No
narrations required. Ignore GST
b) Record the above transactions and events in the general journal of
BomberWorld. Use the periodic inventory method of recording inventory
including entries required to calculate COGS. No narrations required. Ignore
GST
Question 2: Inventory valuation
Williams Ltd is a wholesale distribution business that sells ceramic vases. Williams Ltd
uses the periodic inventory system. The following information relates to the business’s
activities during the financial year ending 30 June 2021:
1 July 2020 – Opening balance 10,000 vases (purchase price $35 per vase)
1 September 2020 – Purchased 20,000 vases (purchase price $37 per vase)
1 February 2021 – Purchased 30,000 vases ($40 per vase)
30 June 2021 – Closing inventory as per physical stocktake is 44,000 vases
Additional information:
(i)
Williams Ltd adopts the FIFO cost-flow method.
(ii)
Transportation from supplier to Williams Ltd costs $8 per vase.
Transportation from Williams Ltd to the retailer costs $10 per vase. Williams
Ltd pays all of the transportation costs.
(iii)
4,000 of the vases in the closing inventory are damaged and can only be
sold to the retailer for $20 per vase. These vases were originally purchased
on 1 February 2021. Transportation cost to the retailer of $10 per vase still
applies.
(iv)
The latest selling price for the ceramic vases is $90 per vase.
Required:
(a) Calculate the value of inventory in the Balance Sheet of Williams Ltd at 30 June
2021 in accordance with AASB 102 Inventories. Justify your answer and show
all workings.
(b) Calculate the inventory write-down, if any, for the financial year ending 30 June
2021. Show your workings.
Question 3: Non-current Assets
Please see the following information related to the two non-current assets below:
Equipment
Cruise Ltd purchased equipment on 1 July 2019 for $1,000,000, with 30% deposit was
paid in cash and the remaining was financed through a bank loan. The useful life and
residual value of the equipment were estimated to be 5 years and $100,000,
respectively. Cruise Ltd depreciates the equipment using the straight-line method. The
equipment is measured using the fair value (revaluation) model.
On 30 June 2020, the fair value of the equipment was estimated to be $700,000.
There was no revaluation required for the equipment on 30 June 2021.
Machine
In addition, Cruise Ltd also purchased a new machine on 1 July 2019 for $96,000
cash. The useful life of the machine was expected to be 6 years, with an estimated
residual value of zero. Cruise Ltd depreciates the machine using the straight-line
method. The machine is measured using the cost (impairment) model.
On 30 June 2020, the machine had a recoverable amount of $65,000.
There was no impairment recorded on the machine on 30 June 2021.
Required:
(a) Prepare the necessary general journal entries to record the transactions related to
the equipment for the financial year ending 30 June 2020 (i.e., from 1 July 2019
to 30 June 2020). Justify your answer in accordance with appropriate accounting
standards regarding the test of materiality. Narrations are NOT required.
(b) Prepare the necessary general journal entry to record the transaction related to
the equipment for the financial year ending 30 June 2021 (i.e., from 1 July 2020
to 30 June 2021). Narrations are NOT required.
(c) Prepare the necessary general journal entries to record the transactions related to
the machine for the financial year ending 30 June 2020 (i.e., from 1 July 2019 to
30 June 2020). Narrations are NOT required.
(d) Prepare the necessary general journal entry to record the transaction related to
the machine for the financial year ending 30 June 2021 (i.e., from 1 July 2020 to
30 June 2021). Narrations are NOT required.
SOLUTIONS
Question 1
(a) Perpetual
Date
Descriptions
Debit $
1 March
Cash
100 000
Inventory
300 000
Capital
2 March
Inventory
400 000
80 000
Accounts Payable
5 March
Accounts Payable
80 000
5 000
Inventory
12 March
17 March
Accounts Payable
5 000
75 000
Cash
72 750
Discount Revenue
2 250
Cash
25 000
Sales Revenue
COGS
25 000
18 000
Inventory
21 March
Credit $
Sales Returns and Allowances
Cash
18 000
2 000
2 000
Inventory
1 500
COGS
22 March
Accounts Receivable
1 500
40 000
Sales Revenue
COGS
40 000
23 000
Inventory
29 March
23 000
Cash
38 000
Discount Expense
2 000
Accounts Receivable
31 March
Inventory Loss
40 000
5 500
Inventory
5 500
(b) Periodic
Date
Descriptions
Debit $
1 March
Cash
100 000
Inventory
300 000
Capital
2 March
Purchases
Accounts Payable
Credit $
400 000
80 000
80 000
5 March
Accounts Payable
5 000
Purchase Returns and Allowances
12 March
17 March
Accounts Payable
5 000
75 000
Cash
72 750
Discount Revenue
2 250
Cash
25 000
Sales Revenue
21 March
Sales Returns and Allowances
25 000
2 000
Cash
22 March
Accounts Receivable
2 000
40 000
Sales Revenue
29 March
40 000
Cash
38 000
Discount Expense
2 000
Accounts Receivable
31 March
COGS
40 000
300 000
Inventory
COGS
Purchases
300 000
80 000
80 000
Purchase Returns
5 000
COGS
Inventory
5 000
330 000
COGS
330 000
Question 2:
1. Identify costs which attach to inventory
Opening inventory – 10,000 vases @ $35
Purchase 1 (1 September) – 20,000 vases @ $37 + 8 = $45
Purchase 2 (1 February) – 30,000 vases @ $40 + 8 = $48
According to AASB102, cost of inventory includes invoice price plus import
duties which should be included if material.
For an item to be material it must affect decision making. The $8 transport cost is
more than 10% of each purchase price (8/40 > 10% or 8/37 > 10%), therefore
does affect decision making and should be included in the cost of inventory.
2. Select a cost flow method
Question says FIFO
3. Determine cost of product on the basis chosen
Closing inventory is the latest goods – closing inventory is 44,000 units
-
30,000 from Purchase 2 (1 February) @ $48
-
14,000 from Purchase 1 (1 September) @ $45
4. Determine NRV for each product
Undamaged vases (40,000 units) = $90 – 10 = $80 each
Damaged vases (4,000 units) = $20 – 10 = $10 each
5. Compare cost vs NRV and select the lower value
Quantity
Cost
NRV
Lower
Latest – Undamaged 26,000
$48
$80
26,000 @ 48 =
1,248,000
Latest – Damaged 4,000
$48
$10
4,000 @ 10 =
40,000
Next Latest – Undamaged
$45
14,000 @ 45 =
$80
630,000
14,000
Total $1,918,000
Closing inventory is $1,918,000
(b) (30,000 x 48) + (14,000 x 45) – 1,918,000 = 152,000
Question 3
(a)
Date
Descriptions
Debit ($)
1 July 2019
Equipment
1,000,000
30 June 2020
Credit ($)
Cash
300,000
Bank loan
700,000
Depreciation expense
Accumulated depreciation
Test: CA materially different from FV
Carrying amount is $820,000 (1,000,000 – 180,000).
Fair value is $700,000.
Difference $120,000
120,000/700,000 = 17.1% is greater than 10%
Influences economic decisions  material.
180,000
180,000
30 June 2020
Accumulated depreciation
180,000
Machine
30 June 2020
Revaluation expense
180,000
120,000
Equipment
120,000
(b)
Date
Account Name
Debit ($)
Depreciation expense
150,000
Credit ($)
(b)
30 June 2021
Accumulated depreciation
150,000
(c)
Date
Description
Debit ($)
1 July 2019
Machine
96,000
Cash or bank
30 June 2020
Depreciation expense
96,000
16,000
Accumulated depreciation
Impairment loss
Credit ($)
16,000
15,000
Accumulated impairment
15,000
(d)
Date
Account Name
Debit ($)
Depreciation expense
13,000
Credit ($)
(b)
30 June 2021
Accumulated depreciation
13,000