Chapter-7: Cash and Receivables

Recognition of Accounts Receivables:

Date Accounts title and explanation Re Debit Credit
f (Taka) (Taka)
Accounts receivables
Service revenue/Sales revenue
[To record the service revenue earned on credit]
For example, if Lululemon Athletica, Inc. (CAN) sells a yoga outfit to Jennifer Burian for
$100 on account, the yoga outfit is transferred when Jennifer obtains control of this outfit.
When this change in control occurs, Lululemon should recognize an account receivable and
sales revenue. Lululemon makes the following entry:
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Accounts receivables 100
Sales revenue 100
[To record the service revenue earned on credit]
Trade discount
Cash discount/Sales discount:
Two methods:
i. Gross method
ii. Net method
Example:
Transactions Gross method Net method
Jan 1, sales of Accounts receivable 10,000 Accounts receivable 9,800
$10,000, terms 2/10, Sales revenue 10,000 Sales revenue 9,800
n/30 [10,000-10,000 x2%]
Jan 9, payments Cash 3,920 Cash 3,920
received for $4,000 Sales discount 80 Accounts receivable 3,920
Accounts receivable 4,000
4,000 x 2%= 80
Jan 20, payments Cash 6,000 Cash 6,000
received for $6,000 Accounts receivable 6,000 Accounts receivable 5,880
Sales discount forfeited 120
Sales return and allowances:
Assume that Max Glass sells hurricane glass to Oliver Builders. As part of the sales
agreement, Max includes a provision that if Oliver is dissatisfied with the product, Max will
grant an allowance on the sales price or agree to take the product back.
On January 4, 2019, Max sells $5,000 of hurricane glass to Oliver on account. Max records
the sale on account as follows.
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Jan 4, Accounts receivables 5,000
 2019 Sales revenue 5,000
[To record the sales revenue earned on credit]
On January 16, 2019, Max grants an allowance of $300 to Oliver because some of the
hurricane glass is defective. The entry to record this transaction is as follows.
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Jan Sales return and allowances 300
16, Accounts receivable 300
2019 [To record the allowance for defective items]
On January 31, 2019, before preparing financial statements, Max estimates that an additional
$100 in sales returns and allowances will result from the sale to Oliver on January 4, 2019.
An adjusting entry to record this additional allowance is as follows.
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Jan Sales return and allowances 100
31, Allowance for sales return and allowances 100
2019 [To record the allowance for sales return and allowance
as estimated]
Valuation of Accounts Receivable:
Debit- bad debt expense or uncollectible expense
Two methods:
i) Direct write-off method
ii) Allowance method
a) Percentage-of-receivables
b) Percentage-of-sales
i) Direct write-off method:
When a company determines a particular account to be uncollectible:
The loss is debited as bad debt expense.
Example:
Assume, for example, that on December 10 Cruz Ltd. writes o ff as uncollectible Yusado’s
NT$8,000,000 balance. The entry is:
Date Accounts title and explanation Re Debit ($) Credit ($)
f
Bad debt expense 80,00,000
Accounts Receivable-Yusado 80,00,000
[To record the write-off of amount due from
Yusado]
ii) Allowance method for uncollectible accounts:
- Estimate uncollectible accounts at the end of each period.
Recording Estimated Uncollectibles
Illustration: Assume that Brown Furniture in 2019, its first year of operations, has credit
sales of £1,800,000. Of this amount, £150,000 remains uncollected at December 31. The
credit manager estimates that £10,000 of these sales will be uncollectible. The adjusting entry
to record the estimated uncollectibles (assuming a zero balance in the allowance account) is:
Date Accounts title and explanation Re Debit Credit
 f ($) ($)
Dec Bad debt expense 10,000
31, Allowance for Doubtful accounts 10,000
2019 [To record the estimated uncollectible at year end]

Write-Off of an Uncollectible Account

Illustration: The financial vice president of Brown Furniture authorizes a write-off of the
£1,000 balance owed by Randall plc on March 1. The entry to record the write-off is:
Date Accounts title and explanation Re Debit Credit
f ($) ($)
March Allowance for Doubtful accounts 1,000
1 Accounts receivable 1,000
[To record the write-off of uncollectible at March 31]
Assume that on July 1, Randall plc pays the £1,000 amount that Brown had written off on
March 1. These are the entries:
Date Accounts title and explanation Re Debit Credit
f ($) ($)
July 1 Accounts receivable 1,000
Allowance for Doubtful accounts 1,000
[To record the cancellation of write-off of uncollectible
at 1st July]
July 1 Cash 1,000
Accounts receivable 1,000
[To record the cash collected from accounts receivable
previously written-off]
Estimating the Allowance:
(a) Percentage-of-Receivables
- Reports estimate of receivables at cash realizable value.
- One composite rate, or
- An aging schedule using different rates
What is the adjusting journal entry when the allowance had a zero balance.
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Dec Bad debt expense 26,610
31 Allowance for Doubtful accounts 26,610
[To record the cancellation of write-off of uncollectible
at Dec 31]
What is the journal entry when the allowance had a credit balance of $800 before adjustment.
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Dec Bad debt expense 25,810
31 Allowance for Doubtful accounts [26,610-800] 25,810
[To record the cancellation of write-off of uncollectible
at Dec 31]
One Composite-rate:
Illustration: Duncan SA reports the following financial information before adjustments.

Instructions: Prepare the journal entry to record Bad Debt Expense assuming Duncan
Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts
receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.
SOLUTION:
Req-(a):
5% of accounts receivable= 1,00,000 x 5%= 5,000 [Cr]
Balance before adjustment= 2,000 [Cr]
Amounts to be adjusted= 5,000 [cr]- 2,000[cr]= 3,000 [cr]
Adjustment entry:
Date Accounts title and explanation Re Debit Credit
 f ($) ($)
Dec Bad debt expense 3,000
31 Allowance for Doubtful accounts 3,000
[To record the cancellation of write-off of uncollectible
at Dec 31]
(b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit
balance.
5% of accounts receivable= 1,00,000 x 5%= 5,000 [Cr]
Balance before adjustment= 1,500 [Dr]
Amounts to be adjusted= 5,000 [cr] + 1,500[dr]= 6,500 [cr]
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Dec Bad debt expense 6,500
31 Allowance for Doubtful accounts 6,500
[To record the cancellation of write-off of uncollectible
at Dec 31]
NOTES RECEIVABLES:
i) Short-term- record at face value less allowance
ii) Record at present value of cash expected to be collected.
Interest rates Note issued at
Stated rate = Market rate Face value
Stated rate> Market rate Premium
Stated rate <Market rate Discount
Note Issued at Face Value
Illustration: Bigelow SA lends Scandinavian Imports €10,000 in exchange for a €10,000,
three-year note bearing interest at 10 percent annually. The market rate of interest for a note
of similar risk is also 10 percent. How does Bigelow record the receipt of the note?
SOLUTION:
Stated interest rate= 10%
Market rate= 10%
Note is issued at Face value
Annual interest= 10,000 x 10%= 1,000
Face value= 10,000
Period is three years [Long-term]; we record the note at present value.
PV at 0 Year-1 Year-2 Year-3
Interest € 2,487 1,000 1,000 1,000 Annuity
Face value € 7,513 10,000
Present value € 10,000
PVIFA (n=3, i=10%)= 2.48685
Present value of interest= Periodic payment x PVIFA (n=3, i=10%)=1,000 x 2.48685=
2,486.85= 2,487
PVIF (n=3, i=10%)= 0.75132
Present value of Face Value= Face value x PVIF (n=3, i=10%)=€ 10,000 x 0.75132=
€7,513.2= €7,513
Present value of interest € 2,487
Present value of Principal € 7,513
Present value of note € 10,000
Journal Entries:
Date Accounts title and explanation Re Debit Credit
f (€) (€)
Jan 1, Yr 1 Note receivable 10,000
Cash 10,000
[To record the issuance of note]
Dec 31, Cash 1,000
Yr 1 Interest revenue 1,000
[To record the receipt of interest on note]
Dec 31, Cash 1,000
Yr 2 Interest revenue 1,000
[To record the receipt of interest on note]
Dec 31, Cash 11,000
Yr 3 Interest revenue 1,000
Note receivable 10,000
[To record the receipt of principal and interest on
note]
ZERO-INTEREST-BEARING NOTE:
Illustration: Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note.
The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record
the receipt of the note?
SOLUTION:
Stated interest rate= 0
Market interest rate= 9%
Face value= 10,000
Period is three years [Long-term]; we record the note at present value.
PV at 0 Year-1 Year-2 Year-3 Remark
Interest 0 0 0
Face value € 7,721.80 10,000
Present value € 7,721.80
PVIF (n=3, i=9%)= 0.77218
Present value of Face Value= Face value x PVIF (n=3, i=10%)=€ 10,000 x 0.77218=
€7,721.80= €7,721.80
Schedule of Note Discount Amortization
Effective-interest method
0% Note Discounted at 9%
Year Cash received Interest revenue Discount Carrying
amortized amount of Note
Date of issue - - - €7,721.80
End of year 1 0 7,721.80 x 9%= 694.96 7,721.80 +
694.96 694.96 =
8,416.76
End of year 2 0 8,416.76 x 9%= 757.51 8,416.76
757.51 +757.51 =
9,174.27
End of year 3 0 825.73 10,000 - 10,000
9,174.27=
825.73
Journal Entries:
Date Accounts title and explanation Ref Debit Credit
(€) (€)
Jan 1, Yr Note receivable 7,721.8
1 Cash 0 7,721.80
[To record the issuance of note]
Dec 31, Note receivable 694.96
Yr 1 Interest revenue 694.96
[To record the interest earned on zero-interest-
bearing note]
Dec 31, Note receivable 757.51
Yr 2 Interest revenue 757.51
[To record the interest earned on zero-interest-
bearing note]
Dec 31, Note receivable 825.73
Yr 3 Interest revenue 825.73
[To record the interest earned on zero-interest-
bearing note]
Dec 31, Cash 10,000
Yr 3 Notes receivable 10,000
[To record the receipt of zero-interest-bearing
note on maturity]
Illustration: Morgan Group makes a loan to Marie Co. and receives in exchange a three-
year, €10,000 note bearing interest at 10 percent annually. The market rate of interest for a
note of similar risk is 12 percent. Prepare the journal entry to record the receipt of the note?
SOLUTION:
Stated interest rate= 10%
Market rate= 12%
Stated rate <Market rate Note is issued at Discount

Note is issued at discount

Annual interest= 10,000 x 10%= 1,000
Face value= 10,000
Period is three years [Long-term]; we record the note at present value.
PV at 0 Year-1 Year-2 Year-3
Interest € 1,000 1,000 1,000 Annuity
Face value € 10,000
Present value €
PVIFA (n=3, i=12%)= 2.40183
Present value of interest= Periodic payment x PVIFA (n=3, i=12%)=1,000 x 2.40183= 2,402
PVIF (n=3, i=12%)= 0.71178
Present value of Face Value= Face value x PVIF (n=3, i=12%)=€ 10,000 x 0.71178= €7,118
Present value of interest € 2,402
Present value of Principal € 7,118
Present value of note € 9,520
Face value of note €10,000
Discount € 480
Schedule of Note Discount Amortization
 Effective-interest method
10% Note Discounted at 12%
Year Cash received Interest revenue Discount Carrying
amortized amount of Note
Date of issue - - - €9,520
End of year 1 10,000 x 10%= 9,520 x 12%= 1,142-1,000= €9,520 + 142=
1,000 1,142 142 9,662
End of year 2 10,000 x 10%= 9,662 x 12%= 1,159-1000= 9,662 + 159=
1,000 1,159 159 9,821
End of year 3 10,000 x 10%= 1,000+179= 10,000-9,821= 10,000
1,000 1,179 179

Journal Entries:
Date Accounts title and explanation Re Debit Credit
f (€) (€)
Jan 1, Yr 1 Note receivable 9,520
Cash 9,520
[To record the issuance of note]
Dec 31, Cash 1,000
Yr 1 Note receivable 142
Interest revenue 1,142
[To record the receipt of interest on note and
amortization of discount]
Dec 31, Cash 1,000
Yr 2 Note receivable 159
Interest revenue 1,159
[To record the receipt of interest on note and
amortization of discount]
Dec 31, Cash 1,000
Yr 3 Note receivable 179
Interest revenue 1,179
[To record the receipt of interest on note and
amortization of discount]
Dec 31, Cash 10,000
Yr 3 Note receivable 10,000
[To record the receipt of note receivable on
maturity]
Illustration: Morgan Group makes a loan to Marie Co. and receives in exchange a three-
year, €10,000 note bearing interest at 10 percent annually. The market rate of interest for a
note of similar risk is 8 percent. Prepare the journal entry to record the receipt of the note?
SOLUTION:
Stated interest rate= 10%
Market rate= 8%
Stated rate > Market rate Note is issued at Premium

Note is issued at premium

Annual interest= 10,000 x 10%= 1,000
Face value= 10,000
Period is three years [Long-term]; we record the note at present value.
PV at 0 Year-1 Year-2 Year-3
Interest € 1,000 1,000 1,000 Annuity
Face value € 10,000
Present value €
PVIFA (n=3, i=8%)= 2.57710
Present value of interest= Periodic payment x PVIFA (n=3, i=8%)=1,000 x 2.57710= 2,577
PVIF (n=3, i=8%)= 0.79383
Present value of Face Value= Face value x PVIF (n=3, i=8%)=€ 10,000 x 0.79383= €7,938
Present value of interest €2,577
Present value of Principal € 7,938
Present value of note € 10,515
Face value of note €10,000
Premium € 515
Schedule of Note Premium Amortization
Effective-interest method
10% Note Discounted at 8%
Year Cash received Interest revenue Premium Carrying
amortized amount of Note
Date of issue - - - €10,515
End of year 1 10,000 x 10%= 10,515 x 8%= 841-1,000= €10,515 +
1,000 841 (159) (159)= 10,356
End of year 2 10,000 x 10%= 10,356 x 8%= 829-1,000= 10,356 + (171)=
1,000 829 (171) 10,185
End of year 3 10,000 x 10%= 1000-185= 815 10,000-10,185= 10,000
1,000 (185)
Journal Entries:
Date Accounts title and explanation Re Debit Credit
f (€) (€)
Jan 1, Yr 1 Note receivable 10,515
Cash 10,515
[To record the issuance of note]
Dec 31, Cash 1,000
Yr 1 Interest revenue 841
Note receivable 159
[To record the receipt of interest on note and
amortization of premium]
Dec 31, Cash 1,000
Yr 2 Interest revenue 829
Note receivable 171
[To record the receipt of interest on note and
amortization of premium]
Dec 31, Cash 1,000
Yr 3 Interest revenue 815
Note receivable 185
[To record the receipt of interest on note and
amortization of premium]
 Dec 31, Cash 10,000
Yr 3 Note receivable 10,000
[To record the receipt of note receivable on
maturity]

NOTES RECEIVED FOR PROPERTY, GOODS OR SERVICES

Illustration: Oasis Development Co. sold a corner lot to Rusty Pelican as a restaurant site.
Oasis accepted in exchange a five-year note having a maturity value of $35,247 and no stated
interest rate. The land originally cost Oasis $14,000. At the date of sale the land had a fair
market value of $20,000. Oasis uses the fair market value of the land, $20,000, as the present
value of the note. Oasis therefore records the sale as:
SOLUTION:
Period= 5 years [Long-term]
Note is recognized at present value
Present value of the note= Fair market value of Land
Journal entry:
Date Accounts title and explanation Re Debit Credit
f ($) ($)
Note receivable 20,000
Land 14,000
Gain on sale of land 6,000
[To record the sale of land by issuing a 5-year note]

SALE OR RECEIVABLES WITHOUT GUARANTEE:

Illustration: Crest Textiles, Inc. factors €500,000 of accounts receivable with Commercial
Factors, Inc., on a non-guarantee basis. Commercial Factors assesses a finance charge of 3
percent of the amount of accounts receivable and retains an amount equal to 5 percent of the
accounts receivable (for probable adjustments). Crest Textiles and Commercial Factors make
the following journal entries for the receivables transferred without guarantee.
SOLUTION:
Finance charge= 5,00,000 x 3%= 15,000
Due from factor= 5,00,000 x 5%= 25,000
In the books of Crest Textiles, Inc.
Date Accounts title and explanation Ref Debit Credit
($) ($)
Cash 4,60,00
Due from Factor 0
Loss on sale of receivables 25,000
Accounts receivable 15,000 5,00,000
[Sale of accounts receivable without guarantee to
the Commercial Factors, Inc.]
In the books of Commercial Factors, Inc.
Date Accounts title and explanation Ref Debit Credit
($) ($)
Accounts receivable 5,00,00
Due to Customer [Crest Textles, Inc.] 0 25,000
Interest revenue 15,000
Cash 4,60,000
 [Sale of accounts receivable without guarantee to
the Commercial Factors, Inc.]

SALE WITH GUARANTEE

For previous example:
In the books of Crest Textiles, Inc.
Date Accounts title and explanation Ref Debit Credit
($) ($)
Cash 4,60,00
Due from Factor 0
Finance charge 25,000
Recourse liability 15,000 5,00,000
[Sale of accounts receivable without guarantee to
the Commercial Factors, Inc.]
In the books of Commercial Factors, Inc.
Date Accounts title and explanation Ref Debit Credit
($) ($)
Accounts receivable 5,00,00
Due to Customer [Crest Textles, Inc.] 0 25,000
Interest revenue 15,000
Cash 4,60,000
[Sale of accounts receivable without guarantee to
the Commercial Factors, Inc.]
SECURED BORROWING:
Illustration: On March 1, 2019, Meng Mills, Inc. provides (assigns) NT$700,000 of its
accounts receivable to Sino Bank as collateral for a NT$500,000 note. Meng Mills continues
to collect the accounts receivable; the account debtors are not notified of the arrangement.
Sino Bank assesses a finance charge of 1 percent of the accounts receivable and interest on
the note of 12 percent. Meng Mills makes monthly payments to the bank for all cash it
collects on the receivables.
March 1: Transfer of accounts receivable and issuance of a 12% note.
March 1-31: Collection of accounts receivable 4,40,000 less cash discounts of 6,000 and sales
return for 14,000.
April 1: Remitted March collection plus accrued interest to the bank.
April 1-30: Collected the balance of accounts receivable less 2,000 written off as
uncollectible.
May 1: Remitted the balance due on the note plus interest on note.
SOLUTION:
In the books of Meng Mill
Date Accounts title and explanation Ref Debit Credit
(NT$) (NT$)
March 1, Cash 4,93,00
2019 Interest expense [7,00,000 x 1%] 0
Notes payable 7,000 5,00,000
[Borrowing the money by issuing note and
accounts receivable collateral]
March 1- Cash [4,40,000-6,000] 4,34,00
31, 2019 Sales discount 0
 Sales return and allowance 6,000
Accounts receivable 14,000 4,54,000
[Collection from accounts receivable after
adjustments for sales return and discount]
April 1, Notes payable 4,34,00
2019 Interest expense [5,00,000 x 12% x 1/12] 0
Cash 5,000 4,39,000
[To record the payment for notes payable with
interest]
April 1- Cash 2,44,00
30, 2019 Allowance for doubtful accounts 0
Accounts receivable [7,00,000-4,54,000] 2,000 2,46,000
[To record the collection due from accounts
receivables after 2,000 written-off]
May 1, Notes payable [5,00,000-4,34,000= 66,000] 66,000
2019 Interest expense [66,000 x 12% x 1/12] 660
Cash 66,660
[To record the payments for balance due in notes
payable with interest]
In the books of Sino Bank
Date Accounts title and explanation Ref Debit Credit
(NT$) (NT$)
March 1, Notes receivable 5,00,00
2019 Cash 0 4,93,000
Interest revenue [7,00,000 x 1%] 7,000
[Lending money by issuing note and accounts
receivable as collateral]
March 1- No entry
31, 2019
April 1, Cash 4,39,00
2019 Notes receivable 0 4,34,000
Interest revenue [5,00,000 x 12% x 1/12] 5,000
[To record the receipt for notes receivable with
interest revenue]
April 1- No entry
30, 2019
May 1, Cash 66,660
2019 Notes receivable 66,000
[5,00,000-4,34,000= 66,000] 660
Interest revenue [66,000 x 12% x 1/12]
Cash
[To record the receipt of balances for notes
receivable with interest revenue]
SECURED BORROWING
Illustration: On April 1, 2019, Prince Company assigns $500,000 of its accounts receivable
to the Hibernia Bank as collateral for a $300,000 loan due July 1, 2019. The assignment
agreement calls for Prince Company to continue to collect the receivables. Hibernia Bank
assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a
realistic rate of interest for a note of this type).
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the accounts
receivable during the period from April 1, 2019, through June 30, 2019.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it secured on
April 1, 2019.
SOLUTION:
In the books of Prince Company
Date Accounts title and explanation Ref Debit Credit
(NT$) (NT$)
April 1, Cash 2,90,00
2019 Interest expense [5,00,000 x 2%] 0
Notes payable 10,000 3,00,000
[Borrowing the money by issuing note and
accounts receivable as collateral]
April 1- Cash 3,50,00
June 30, Accounts receivable 0 3,50,000
2019 [Collection from accounts receivable]
July 1, Notes payable 3,00,00
2019 Interest expense [3,00,000 x 10% x 3/12] 0
Cash 7,500 3,07,500
[To record the payment for notes payable with
interest]
CHAPTER-08: VALUATION OF INVENTORIES: A COST-
BASIS APPROACH
Merchandiser:
One inventory- Merchandise inventory
Manufacturer:
Three inventories accounts- raw materials, work-in-process, finished goods
PERPETUAL INVENTORY SYSTEM:
- Purchases of merchandise: Inventory – Dr
- Freight-in: Inventory-Dr
- Purchase return, allowance and discount: Inventory-Cr
- Sales : Cost of goods sold-Dr; Inventory-Cr

PERIODIC INVENTORY SYSTEM:

- Purchases of merchandise: Purchase- Dr
- Ending inventory- physical count
- Calculation cost of goods sold:
Beginning inventory 1,00,000
Add: Purchases, net 8,00,000
Cost of goods available for sales 9,00,000
Less: Ending inventory 1,25,000
Cost of goods sold 7,75,000

Comparing Perpetual and Periodic Systems

Illustration: Fesmire Company had the following transactions during the current year.
Record these transactions using the Perpetual and Periodic systems.
SOLUTION:
Journal entries under Perpetual Inventory System
Date Accounts title and explanation Ref Debit Credit
($) ($)
Non-entry is required
Inventory 5,400
Accounts payable 5,400
[To record the purchase of merchandise on
account]
Accounts receivable 7,200
Sales revenue 7,200
[To record the sales]
Cost of goods sold 3,600
Inventory 3,600
[To record the cost of sold items]
No entry is required.
Journal entries under Periodic Inventory System
Date Accounts title and explanation Ref Debit Credit
($) ($)
Non-entry is required
Purchase 5,400
Accounts payable 5,400
[To record the purchase of merchandise on
account]
Accounts receivable 7,200
Sales revenue 7,200
[To record the sales]
Inventory (physical count) 2,400
Cost of goods sold 3,600
Purchases 5,400
Inventory [Beginning] 600

Illustration: Assume that at the end of the reporting period, the perpetual inventory account
reported an inventory balance of $4,000. However, a physical count indicates inventory of
$3,800 is actually on hand. The entry to record the necessary write-down is as follows.
Date Accounts title and explanation Ref Debit Credit
($) ($)
Inventory Over and Short 200
Inventory 200
[To record the adjustment of inventory to physical
 count]
NOTE: Inventory over and short adjusts cost of goods sold. Companies sometimes report
inventory over and short in the “Other income and expense” section of income statement.
DETERMINING COST OF GOODS SOLD:
Beginning inventory 1,00,000
Add: Purchases, net 8,00,000
Cost of goods available for sales 9,00,000
Less: Ending inventory 2,00,000
Cost of goods sold 7,00,000

TREATMENT OF DISCOUNT:
Two methods:
i) Gross method
ii) Net method
EXAMPLE:
July-1: Purchase cost $10,000, terms 2/10, net 30
July-9: Invoices of $4,000 are paid
July-19: Invoices of $6,000 are paid
Gross Method: [Periodic Inventory System]
Date Accounts title and explanation Ref Debit Credit
($) ($)
July 1 Purchase 10,000
Accounts payable 10,000
[To record the purchase on account]
July 9 Accounts payable 4,000
Purchase discount [4,000 x 2%] 80
Cash 3,920
[To record the payment of $4,000 within discount
period]
July 19 Accounts payable 6,000
Cash 6,000
[To record the payment of $6,000 after discount
period]
Net Method: [Periodic Inventory System]
Date Accounts title and explanation Ref Debit Credit
($) ($)
July 1 Purchase 9,800
Accounts payable [10,000-10,000 x 2%] 9,800
[To record the purchase on account]
July 9 Accounts payable 3,920
Cash 3,920
[To record the payment of $4,000 within discount
period]
July 19 Accounts payable 5,880
Purchase discount lost 120
Cash 6,000
[To record the payment of $6,000 after discount
period]
COST FLOW METHODS:
1. Specific Identification
Or
2. Two/Three cost flow assumptions
-First-in, First-out (FIFO)
-Average Cost
-Last-in, First-out (LIFO)
To illustrate the cost flow methods, assume that Call-Mart SpA had the following
transactions in its first month of operations.
Date Purchases Sold or Issued Balance
March 1 2,000 @$4.00= $8,000
March 15 6,000 @ $4.40 8,000
March 19 4,000 4,000
March 30 2,000 @ $4.75 6,000

Cost of ending inventory=? [It is used to calculate COGS and it is also shown as current
assets in balance sheet]
Cost of goods sold (COGS)= ? [in Income statement, COGS is deducted from net sales to
arrive gross profit.
Gross profit= Sales revenue- COGS
Calculation of cost of goods available for sales:
Beginning inventory 2,000 $4.00 $8,000
Purchases:
March 15 6,000 4.40 $26,40
March 30 2,000 4.75 $ 9,500
Cost of goods available for sales 10,000 $ 43,900
First Method: Specific Identification
Illustration: Call-Mart Inc.’s 6,000 units of inventory consists of 1,000 units from the March
1 beginning inventory, 3,000 from the March 15 purchase, and 2,000 from the March 30
purchase. Compute the amount of ending inventory and cost of goods sold.
Available inventory= 10,000
Sold inventory= 4,000
Inventory on hand= 10,000-4,000= 6,000
Cost of ending inventory:
Date Number of units Unit cost Total cost
March 1 1,000 $4.00 $ 4,000
March 15 3,000 4.40 13,200
March 30 2,000 4.75 9,500
Ending inventory 6,000 $26,700
Cost of ending inventory= $26,700
Cost of goods sold=?
Cost of goods available for sales $ 43,900
Less: Cost of ending inventory $26,700
Cost of goods sold $17,200

First-in, First-out (FIFO):

Under Periodic Inventory System:
Ending inventory?
Date Number of units Unit cost Total cost
March 30 2,000 4.75 9,500
March 15 4,000 4.40 17,600
Ending inventory 6,000 $27,100
Cost of ending inventory= $27,100
Cost of goods available for sales $ 43,900
Less: Cost of ending inventory $27,100
Cost of goods sold $16,800
Under perpetual inventory system:
Date Purchased Sold or issued Balance
March 1 2,000 @$ 4.00 =$8,000
March 15 6,000 @ $4.40= 26,400 2,000 @$ 4.00 =$8,000
6,000 @ $4.40= 26,400
March 19 2,000 @ $4.00 =8,000 4,000 @ $4.40= 17,600
2,000 @ $4.40= 8,800
March 30 2,000 @ $4.75= 9,500 4,000 @ $4.40= 17,600
2,000 @ $4.75= 9,500
Cost of ending inventory= 17,600+9,500= 27,100
Cost of goods sold= 8,000+8,800= 16,800
Average Cost:
Weighted average cost method [Periodic Inventory System]:
Weighted average cost per unit= Total cost of goods available/Total units available
Units Unit cost Total cost
Beginning inventory 2,000 $4.00 $8,000
Purchases:
March 15 6,000 4.40 $26,40
March 30 2,000 4.75 $ 9,500
Available for sales 10,000 $ 43,900
Weighted average cost per unit= Total cost of goods available/Total units available= $
43,900/10,000= $4.39 per unit
Inventory in hand= 6,000 units
Cost of ending inventory= 6,000 units x $4.39 per unit= $26,340
Cost of goods available for sales $ 43,900
Less: Cost of ending inventory $26,340
Cost of goods sold $17,560

Moving-Average Cost Method [Perpetual Inventory System]

Date Purchased Sold or issued Balance
March 1 2,000 @$ 4.00 =$8,000
March 15 6,000 @ $4.40= 26,400 8,000 @$ 4.30 =$34,400
March 19 4,000@$ 4.30 = 17,200 4,000 @ $4.30= 17,200
March 30 2,000 @ $4.75= 9,500 6,000 @ $4.45=26,700
Cost of ending inventory= $26,700
Cost of goods sold= $17,200
Third Assumption: LIFO
Under Periodic Inventory System:
Ending inventory?
 Date Number of units Unit cost Total cost
March 1 2,000 $4.00 $8,000
March 15 4,000 $4.40 17,600
Ending inventory 6,000 $25,600
Cost of ending inventory= $25,600
Cost of goods available for sales $ 43,900
Less: Cost of ending inventory $25,600
Cost of goods sold $26,300

Under perpetual inventory system:

Date Purchased Sold or issued Balance
March 1 2,000 @$ 4.00 =$8,000
March 15 6,000 @ $4.40= 26,400 2,000 @$ 4.00 =$8,000
6,000 @ $4.40= 26,400
March 19 4,000 @ $4.40 =17,600 2,000 @$ 4.00 =$8,000
2,000 @ $4.40= $8,800
March 30 2,000 @ $4.75= 9,500 2,000 @$ 4.00 =$8,000
2,000 @ $4.40= $8,800
2,000 @ $4.75= $9,500
Cost of ending inventory= 8,000+8,800+9,500= $26,300
Cost of goods sold= $17,600
CHAPTER-09: INVENTORIES: ADDITIONAL VALUATION ISSUES

Net realizable value= Estimated selling price – Estimated costs to complete – Estimated costs
to make a sale.
Illustration: Assume that Mander AG has unfinished inventory with a cost of €950, a sales
value of €1,000, estimated cost of completion of €50, and estimated selling costs of €200.
Mander’s net realizable value is computed as follows.
SOLUTION:
Inventory value-unfinished 1,000
Less: Estimated cost of completion 50
Less: Estimated selling cost 200
250
Net realizable value 750

Net realizable value= 750

Cost of unfinished inventory= 950
The company should report inventory on its balance sheet at 750.
In the income statement, the company should reports a loss on inventory write-down of 200
[950-750]
Cost or Net realizable value= C or NRV
Lower of C or NRV= LCNRV
Recording NRV Instead of Cost
Illustration: Data for Ricardo SpA
Cost of goods sold (before adj. to NRV) €108,000
Ending inventory (cost) 82,000
Ending inventory (at NRV) 70,000
First Method: Loss Method
Date Accounts title and explanation Ref Debit Credit
($) ($)
Loss due to decline in NRV 12,000
Inventory 12,000
[To record the inventory at a reduced cost due to
loss to decline in NRV]
Second Method: COGS Method
Date Accounts title and explanation Ref Debit Credit
($) ($)
Cost of goods sold 12,000
Inventory 12,000
[To record the inventory at a reduced cost due to
decline in NRV]

Balance Sheet presentation:

Loss Method COGS Method

Current Assets:
Inventory [82,000-12,000] 70,000 70,000
Prepaids 20,000 20,000
Accounts receivable 3,50,000 3,50,000
Cash 1,00,000 1,00,000
Total current assets 5,40,000 5,40,000
Income Statement

Use of an allowance:
First Method: Loss Method
Date Accounts title and explanation Ref Debit Credit
($) ($)
Loss due to decline of inventory to NRV 12,000
Allowance to reduce inventory to NRV 12,000
 [To record the inventory at a reduced cost due to
loss to decline in NRV]

Balance Sheet presentation with allowance method:

Loss Method
Current Assets:
Inventory (at cost) 82,000
Less: Allowance to reduce inventory to NRV 12,000
70,000
Prepaids 20,000
Accounts receivable 3,50,000
Cash 1,00,000
Total current assets 5,40,000
Recovery of Inventory Loss:
Continuing the Ricardo example, assume the net realizable value increases to €74,000 (an
increase of €4,000). Ricardo makes the following entry, using the loss method.
Date Accounts title and explanation Ref Debit Credit
($) ($)
Allowance to reduce inventory to NRV 4,000
Recovery of inventory loss 4,000
[To record the inventory at a reduced cost due to
loss to decline in NRV]
Allowance account is adjusted in subsequent periods, such that inventory is reported at the
LCNRV.
Date Inventory at Inventory at Amount Adjustment Effect on net
cost net realizable required in of allowance income
value allowance account
account balance
31.12.2019 1,88,000 1,76,000 12,000 12,000 Decrease
increase
31.12.2020 1,94,000 1,87,000 7,000 5,000 Increase
decrease
31.12.2021 1,73,000 1,74,000 0 7000 Increase
decrease
31.12.2022 1,82,000 1,80,000 2,000 2,000 Decrease
increase
P9.1: Remmers SE manufactures desks. The 2019 catalog was in e ffect through November
2019, and the 2020 catalog is effective as of December 1, 2019. At December 31, 2019, the
following finished desks appear in the company’s inventory.
Instructions: At what amount should the four desks appear in the company’s December 31,
2019, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-net
realizable value approach for valuation of inventories on an individual-item basis?
SOLUTION:
Finished Desks A B C D
2019 Catalog selling price 450 480 900 1,050
FIFO cost per inventory list 12/31/19 470 450 830 960
Estimated cost to complete and sell 50 110 260 200
2020 catalog selling price 500 540 900 1,200
Net realizable value= catalog selling price- Estimated 500- 540- 900- 1,200-
cost to complete and sell 50= 110= 260= 200=
450 430 640 1,000
FIFO cost per inventory list 12/31/19 470 450 830 960
Lower-of-Cost-or-NRV 450 430 640 960
Gross profit method of Estimating Inventory
Illustration: Cetus SE has a beginning inventory of €60,000 and purchases of €200,000, both
at cost. Sales at selling price amount to €280,000. The gross profit on selling price is 30
percent. Cetus applies the gross margin method as follows.
SOLUTION:
Beginning inventory (at cost) € 60,000
Add: Purchases (art cost) € 200,000
Cost of goods available for sales (at cost) 2,60,000
Sales (at selling price) 2,80,000
Less: Gross profit [2,80,000 x 30%] 84,000
Sales (at cost) 1,96,000
Approximate inventory (at cost) € 64,000
Selling price and gross profit on selling price.
If selling price is given, but the gross profit is given as a percentage of cost.
Gross profit is 25% on cost.
Cost + Gross profit= Sales
If cost= 100, then gross profit= 100 x 25%= 25
Sales= 100+25= 125
% of gross profit on selling price= 25/125= 1/5= 20% on selling price.
If the cost is given, the percentage is given on retail or selling price.
Gross profit= 20% on selling price.
Selling price= 100
Gross profit= 100 x 20%= 20
Cost= 100-20= 80
% of gross profit on cost= 20/80= ¼= 0.25= 25% on cost.
E9.14: Astaire ASA uses the gross profit method to estimate inventory for monthly reporting
purposes. Presented below is information for the month of May.
Inventory, May 1 € 160,000
Sales € 1,000,000
Purchases (gross) 640,000
Sales returns 70,000
Freight-in 30,000
Purchases discounts 12,000
Instructions:
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of
sales.
(b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of
cost.
SOLUTION:
Req-(a): Assuming that the gross profit is 25% of sales
Particulars Amount Amount Amount
Inventory, May 1 (at cost) € 160,000
Add: Purchases (gross) (at cost) 6,40,000
Less: Purchase discount (12,000)
Add: Freight-in 30,000
Cost of purchases 6,58,000
Cost of goods available for sales 8,18,000
Sales (at selling price) 10,00,00
0
Sales return (at selling price) 70,000
Net sales (at selling price) 9,30,000
Less: Gross profit [25% of 9,30,000] 2,32,500
Sales (at cost) 6,97,500
Approximate inventory, May 31 (at cost) 1,20,500
Req-(b): Assuming that the gross profit is 25% of cost.
Gross profit is 25% on cost
Cost= 100
Gross profit= 100 x 25%= 25
Sales= 100+ 25= 125
% of gross profit on sales= 25/125= 1/5= 0.20= 20% on sales
Particulars Amount Amount Amount
Inventory, May 1 (at cost) € 160,000
Add: Purchases (gross) (at cost) 6,40,000
Less: Purchase discount (12,000)
Add: Freight-in 30,000
Cost of purchases 6,58,000
Cost of goods available for sales 8,18,000
Sales (at selling price) 10,00,00
0
Sales return (at selling price) 70,000
Net sales (at selling price) 9,30,000
Less: Gross profit [20% of 9,30,000] 1,86,000
Sales (at cost) 7,44,000
Approximate inventory, May 31 (at cost) 74,000
Retail Inventory Method:
- Method used by the retailers to compile inventories at retail prices
- Total cost and retail value of goods purchased
- Total cost and retail value of the goods available for sale
- Sales for the period
Two method:
i) Conventional method
 ii) Cost method
i) Conventional Method:
Illustration: The following data pertain to a single department for the month of October for
Fuque Ltd. Prepare a schedule computing retail inventory using the Conventional and Cost
methods.

SOLUTION: CONVENTIONAL METHOD

Particulars Cost Retail Cost to
retail %
Beginning inventory 52,000 78,000
Purchases 2,72,00 4,23,000
0
Less: Purchase return (5,600) (8,000)
Freight-in 16,600
Mark-up (net) 7,000
Current year addition 2,83,000 4,22,000
Goods available for sales 3,35,000 5,00,000 67%
Less: Mark-downs, net (3,600)
Less: Normal spoilage and (10,000)
breakage
Less: Sales (3,90,000
)
Ending inventory at retail 96,400
Ending inventory at cost 64,588
96,400 x 67%

SOLUTION: COST METHOD

Particulars Cost Retail Cost to
retail %
Beginning inventory 52,000 78,000
Purchases 2,72,000 4,23,000
Less: Purchase return (5,600) (8,000)
Freight-in 16,600
Mark-up (net) 7,000
Less: Mark-downs, net (3,600)
Current year addition 2,83,000 4,18,400
 Goods available for sales 3,35,000 4,96,400 67.49%
Less: Normal spoilage and (10,000)
breakage
Less: Sales (3,90,000
)
Ending inventory at retail 96,400
Ending inventory at cost 65,060
96,400 x 67.49%
CHAPTER-17: INVESTMENT
Financial Assets: A non-physical asset that gets its value from a contractual right or
ownership claim. Two types:
i. Debt investment
ii. Equity investment
HELD-FOR-COLLECTION
Companies group debt investments into three categories:
i. Held-for-collection
ii. Held-for-collection and selling
iii. Trading
Accounting Treatment for Debt Investments by category:

Category Valuation Unrealized gains or Other income

losses
Held-for-collection Amortized cost Not recognized Interest when
earned; gains and
losses for sale
Held-for-collection Fair value Recognizes as other Interest when
and selling comprehensive earned; gains and
income and as a losses for sale
separate component
of equity
Trading securities Fair value Recognized in net Interest when
income earned; gains and
losses from sale
DEBT INVESTMENT-HELD-FOR-COLLECTION
DEBT INVESTMENT AT AMORTIZED COST
Illustration: Robinson SA purchased €100,000 of 8 percent bonds of Evermaster AG on
January 1, 2019, at a discount, paying €92,278. The bonds mature January 1, 2024 and yield
10 percent; interest is payable each July 1 and January 1. Robinson SA closes its accounts at
December 31 each year. Record the investment in the books of Robinson.
SOLUTION:
Debt Investment Amortization Schedule
8% Bonds Purchased to yield 10%
 Date Cash received Interest revenue Bond discount Carrying
amortization amount of
bonds
1/1/2019 92,278
1/7/2019 1,00,000 x 8% x 92,278 x 10% x 4,614-4,000= 92,278+614=
½= 4,000 ½= 4,614 614 92,892
1/1/2020 4,000 4,645 645 93,537
1/7/2020 4,000 4,677 677 94,214
1/1/2021 4,000 4,711 711 94,925
1/7/2021 4,000 4,746 746 95,671
1/1/2022 4,000 4,783 783 96,454
1/7/2022 4,000 4,823 823 97,277
1/1/2023 4,000 4,864 864 98,141
1/7/2023 4,000 98,141 X 10% 907 99,048
X ½= 4,907
1/1/2024 4,000 4,000+ 952= 1,00,000- 1,00,000
4,952 99,048= 952
Journal Entries
Date Accounts title and explanation Ref Debit Credit
(€) (€)
1/1/2019 Debt investment 92,278
Cash 92,278
[To record the debt investment in Evermaster AG
at discount]
1/7/2019 Cash 4,000
Debt Investment 614
Interest revenue 4,614
[To record the receipt of interest earned]
31/12/2019 Interest receivable 4,000
Debt Investment 645
Interest Revenue 4,645
[To record the interest earned]
1/1/2020 Cash 4,000
Interest receivable 4,000
[To record the interest received]
1/7/2020 Cash 4,000
Debt Investment 677
Interest revenue 4,677
[To record the receipt of interest earned]
31/12/2020 Interest receivable 4,000
Debt Investment 711
Interest Revenue 4,711
[To record the interest earned]
1/1/2021 Cash 4,000
Interest receivable 4,000
[To record the interest received]
Reporting of Bond Investment at Amortized Cost
Statement of Financial Position
 As at 31/12/2019
Long-term investments:
Debt Investment 93,537
Current Assets:
Interest receivable 4,000
Income Statement
For the year ended 31st December, 2019
Other income and expenses:
Interest revenue [4,614+4,645] 9,259
Assume that Robinson sells its investment on November 1, 2021, at 99¾ plus accrued
interest. Robinson records this discount amortization as follows:
Date Accounts title and explanation Ref Debit Credit
(€) (€)
1/11/2021 Debt investment 522
Interest revenue 522
[To record the discount amortization in debt
investment for four months]
783*4/6
Computation of Gain or Loss on sale of Bonds:
Selling price of bonds exclusive of accrued interest [1,00,000 x 99,750
99.75%]
Less: Book value of bonds on November 1,2021
Amortized cost, July 1, 2021 95,671
Add: Discount amortized for the period from July 1 to 522
November 1, 2021
Book value 96,193
Gain on sale of bonds 3,557
Journal Entry:
Date Accounts title and explanation Ref Debit Credit
(€) (€)
1/11/2021 Cash 1,02,41
Interest revenue [4,000 x 4/6] 7 2,667
Debt Investment 96,193
Gain on sale of Debt Investment 3,557
1,00,000 x 99.75% + Due interest
DEBT INVESTMENT-HELD-FOR-COLLECTION AND SELLING [HFCS]
DHFC follow the same accounting entries as debt investment held for collection during the
reporting period. That, is they are recorded at amortized cost.
However, at each reporting date, companies
i. Adjust the amortized cost to fair value,
ii. Any unrealized holding gains or loss is reported as part of other comprehensive
income rather than in the profit and loss statement.
Illustration: Graff plc purchases £100,000, 10 percent, five-year bonds on January 1, 2019,
with interest payable on July 1 and January 1. The bonds sell for £108,111, which results in a
bond premium of £8,111 and an effective-interest rate of 8 percent. Graff records the
purchase of the bonds as follows and subsequent interest earned.
SOLUTION:
Coupon rate= 10%
Face value= 1,00,000
Effective-interest rate= 8%
Bond premium= $8,111
Debt Investment Amortization Schedule
10% Bonds Purchased to yield 8%
Date Cash received Interest revenue Bond premium Carrying
amortization amount of
bonds
1/1/2019 1,08,111
1/7/2019 1,00,000 x 10% 1,08,111 x 8% x 5,000-4,645= 1,08,111-676=
x ½= 5,000 ½= 4,324 676 1,07,435
1/1/2020 1,00,000 x 10% 1,07,435 x 8% x 5,000-4,297= 1,07,435-703=
x ½= 5,000 ½= 4,297 703 1,06,732
1/7/2020 5,000 4,269 731 1,06,001
1/1/2021 5,000 4,240 760 1,05,241
1/7/2021 5,000 4,210 790 1,04,451
1/1/2022 5,000 4,178 822 1,03,629
1/7/2022 5,000 4,145 855 1,02,774
1/1/2023 5,000 4,111 889 1,01,885
1/7/2023 5,000 4,075 925 1,00,960
1/1/2024 5,000 5,000-960= 1,00,960- 1,00,000
4,040 1,00,000= 960
Journal Entries:
Date Accounts title and explanation Ref Debit Credit
(€) (€)
1.1.2019 Debt investments 1,08,111
Cash 1,08,111
[To record the debt investment for cash]
1.7.2019 Cash 5,000
Debt investments 676
Interest revenue 4,324
[To record the interest revenue earned and
amortization of debt premium]
31.12.2019 Interest receivable 5,000
Debt investment 703
Interest revenue 4,297
[To record the interest revenue earned and the
amortization of debt premium]
At the end of the year, we have to apply fair value method for these investments.
To apply the fair value method to these debt investments, assume that at December 31,
2019 the fair value of the bonds is £105,000. Graff makes the following entry.
The book value from the table $1,06,732.
Unrealized loss= Book value – Fair value= 1,06,732-1,05,000= 1,732.
The following entry is prepared.
31.12.2019 Unrealized holding gains or loss-Equity 1,732
Fair value adjustment 1,732
[To record the unrealized loss at the end of the
accounting period.]