Revision

Ex 1
During May 2014, the following changes in inventory item K333 took
place:
Date Explanation Units Unit Cost
May 1 Balance 1600 $10
9 Purchased 400 12
18 Purchased 1000 15
10 Sold 1800
Perpetual inventories are maintained.
Required:
What is the cost of sales and ending inventory for item K333 under
the following methods? (Show calculations.)
1. FIFO.
2. LIFO.
3. The weighted average.
Answer
Number of units in ending inventory =
Beginning inventory + Goods Purchased – Goods sold
= 1600+ [400 +1000] – 1800= 1200 units
Cost of Ending Inventory and Cost of Goods Sold (Sales)
1- FIFO
Goods Cost of goods sold Inventory balance
purchased (Cost of Sales)
May. 1 Beg.Inventory 1600 × 10

May. 9 400 1600 × 10

400 × 12
May. 10 1600 × 10 = 16000 200 × 12
200 × 12 = 2400
1800 $18400

May. 18 1000 × 15 200 × 12 = 2400

1000 × 15 = 15000
Other Solution (without the table) : 1- FIFO 1200 $ 17400
Cost of sales = 1600 units × $10 + 200 units × $12 = $18,400
Cost of ending inventory = 200 units × $12 + 1000 units × $15 = $17,400
 Cost of Ending Inventory and Cost of Goods Sold (Sales)
2- LIFO
Goods Cost of goods sold Inventory balance
purchased (Cost of Sales)
May. 1 Beg.Inventory 1600 × 10

May. 9 400 1600 × 10

400 × 12
May. 10 400 × 12 = 4800 200 × 10
1400 × 10 = 14000
1800 $18800

May. 18 1000 × 15 200 × 10 = 2000

1000 × 15 = 15000
Other Solution (without the table) : 2- LIFO 1200 $ 17000
Cost of sales = 400 units × $12+ 1400 units × $10= $18,800
Cost of ending inventory = 200 units × $10+ 1000 units × $15 = $17,000
Cost of Ending Inventory and Cost of Goods Sold (Sales)
3- Weighted Average
Goods Cost of goods sold Inventory Average
purchased (Cost of Sales) balance
May. 1 Beg. 1600 × 10 $ 10
Inventory
May. 9 400× 12 1600 × 10 =
16000
400 × 12 = $ 10.4
4800
2000 $ 20800
May. 1800 × 10.4 200 × 10.4 = $ $ 10.4
10 =$18720 2080
May. 1000 × 15 200 × 10.4 =
18 2080
So : Cost of sales = 1800 units × $10.4= $18720
Cost of ending inventory = $17080 1000 × 15 =
15000
Ex 2
Alpha Company produces a variety of coverings for electrical wiring. On
January 1, 2011 it acquired new production equipment at a cost of
$900,000. The equipment has an expected life of four years and an
estimated salvage value of $140,000.
Required:
1. Prepare a four-year depreciation schedule for the equipment under:
1.1 Straight-line method.
1.2 Reducing-balance method ( Depreciation rate is 37.2% ).
2. Assume that on January 1, 2014 the company disposed of the
equipment for $240,000. Under the reducing-balance method,
compute the gain or loss on disposal for financial reporting purposes.
3. Explain how the gain or loss in part 2 would be reported in the
company’s income statement.
1.1 Straight –line method Answer
Depreciation expense = ($9000,000 – $140,000) ÷ 4 years = $190,000
per year
OR = ($9000,000 – $140,000) × 25 % = $190,000
= 1 ÷ 4 years = .25 = 25 %
1.1 Straight-line depreciation schedule:
1 2 3 4 = 2 -3

Carrying amount Depreciation Carrying amount

Year
b/d Expense c/d

2011 900,000 $190,000 $710,000

2012 710,000 190,000 520,000

2013 520,000 190,000 330,000

2014 330,000 190,000 140,000

1.2 Reducing-balance depreciation schedule:

1 2 3 4 = 2 -3

Depreciation Expense
Carrying amount = Carrying amount
Year
b/d carrying amount b/d × c/d
depreciation rate 37.2%
2011 900,000 $334,800 $565,200

2012 565,200 210,255 354,945

2013 354,945 132,040 222,905

2014 222,905 82,920 139,985*

* the difference, $15, is due to rounding

Almost 140,000 the residual
value
In case the depreciation case was not given in the exercise:
It must be calculated as follows:

The depreciation rate =

1-

Where: n = the economic useful life

The depreciation rate = 1 -

The depreciation rate = 1 – 0.628

The depreciation rate = 0.372 or 37.2%
2- Alpha Company disposed of the equipment on 1 January 2014 for
$240,000. The carrying amount at the date of disposal was $222,905

Disposal proceeds - carrying amount = Gain on disposal

$240,000 - 222,905 = $ 17,095

As the disposal proceeds exceeded the carrying amount, the difference

between the two figures is a gain on disposal.

3- The gain on disposal is reflected in the income statement but not in

the revenue total for the year, but instead is can be treated as a
deduction from expenses. According to IASB Framework, income
includes both revenue and gains. Revenue arises in the course of the
business’s normal activity and includes items such as sales, rent
receivable and interest receivable. Gains include items such as those
arising on the disposal of a non-current asset. If material, gains are
usually disclosed separately, in a section usually called other gains
(losses) section or called other income and expenses section.
Ex 3
Ahmad has started business as a sole trader on 1 May, 2014. The
following transactions and events of trading for his first month are as
follows:
Date Transaction
1 Started the business by introducing $80,000 into the business bank account.
3 Rent is paid by cheque $3,000 for the month.
9 Ahmad paid $22,000 in cash for a van.
11 Ahmad purchased goods costing $9,000 on credit from Sarah (invoice no.
SR0123).
14 Ahmad sold goods for $1,500 in cash.
16 Ahmad sold goods for $4,000 on credit to Ali (invoice no. AL.0001)
25 Ahmad paid $8,550, taking advantage of a 5% settlement discount with
respect to invoice no. SR0123.
28 Ali paid $3,880, taking advantage of a 3% settlement discount with respect to
invoice no. AL.0001.

Required:
1. Enter the above transactions into their appropriate cash books.
2. Post the transactions directly into their appropriate nominal ledger accounts.
3. Prepare the trial balance as at May 31, 2014.
Cash book: receipts
Discount
Date: Narrative Total Receivables Other
allowed
$ $ $ $
1 May Capital 80,000 80,000
14 May Cash sale 1,500 1,500
28 May Ali, AL.0001 3,880 4,000 120
Total 85,380 4,000 81,500 120
1 June Balance b/d 51,830

Cash book: payments

Discount
Date: Narrative Total Payables Other
received
$ $ $ $
3 May Rent for May 3,000 3,000
9 May Van 22000 22,000
28 May Sarah, SR0123 8,550 9,000 450
Total Payments 33,550 9,000 25,000 450
31 May Balance c/d 51,830
85,380
Nominal ledger accounts

Cash at bank account

$ $
31 May Total 85,380 31 May Total 33,550
receipts payments
31 May Balance c/d 51,830
85,380 85,380
1 June Balance b/d 51,830

Capital account
$ $
31 May Cash at bank 80,000

Van account
$ $
31 May Cash at bank 22,000

Rent expense account

$ $
31 May Cash at bank 3,000
 Sales account
$ $
31 May Cash at bank 1,500
31 May Receivables 4,000
control
5,500

Discounts allowed account

$ $
31 May Receivables 120

Receivables control account

$ $
31 May Sales 4,000 31 May Discounts 120
allowed
31 May Cash at bank 3,880
4000 4000

Purchases account
$ $
31 May Payables 9,000
 Discounts received account
$ $
31 May Payables 450
Payables control account
$ $
31 May Discounts 450 31 May Purchases 9,000
received
31 May Cash at bank 8,550
9,000 9,000

2- The trial balance:

Ahmad Company
Trial Balance
As at May 31, 2013
Account Debit Credit
$ $
Cash at bank 51,830
Van 22,000
Capital 80,000
Sales 5,500
Rent 3,000
Discount allowed 120
Purchases 9,000
Discount received 450
Total $85,950 $85,950