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Lower of Cost And Net Realisable Value

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The information below relates to barrels of oil held in the inventory of Olsen’s Ltd during 2015.

Barrels

Unit cost

1 January

15 April

13 May

9 August

28 October

Beginning inventory

Purchases

Sales ($52 per barrel)

Purchases

Sales ($52 per barrel)

30 000

40 000

(50 000)

35 000

(40 000)

$44

44

44

Owing to an oil glut, the net realisable value for a barrel of the same grade of oil was $40 per barrel on 31 December 2015. In 2016, the company disposed of the 15 000 barrels of oil in the ending inventory for $600 000. No additional purchases were made in 2016. Olsen’s Ltd uses a periodic inventory system and the average cost flow method. Ignore GST.

Required

Complete the following partial income statements for 2015 and 2016 under the average cost flow method and the lower of cost and net realisable value rule.

OLSEN’S LTD

Income Statements

for the years 2015 and 2016

Average cost

LC & NRV

2015

2016

2015

2016

INCOME: Sales

$4 680 000

$600 000

$4 680 000

$600 000

Cost of sales:

Beginning inventory

1 320 000

660 000

1 320 000

600 000

Purchases

3 300 000

3 300 000

Cost of goods available for sale

4 620 000

660 000

4 620 000

600 000

Less: Ending inventory

660 000

600 000

Cost of sales

3 960 000

660 000

4 020 000

600 000

GROSS PROFIT

$720 000

$(60 000)

$660 000

$nil

FIFO method — perpetual inventory system

Tamworth Trading Ltd is a company operating in the retail sector. The beginning inventory of Product EF5089 and information about purchases and sales made during June are shown below:

June

1

9

12

21

24

26

30

Inventory

Purchases

Sales

Purchases

Sales

Sales

Purchases

Sales

6 100

4 600

4 100

4 100

3 100

2 900

3 100

2 600

units

units

units

units

units

units

units

units

@

@

@

@

$2.20

2.25

2.40

2.50

Tamworth Trading Ltd uses the perpetual inventory system, and all purchases and sales are on credit. Selling price is $5 per unit. GST is 10% and is not included in any of the costs and selling prices above. A stocktake on 30 June revealed 5150 units in inventory.

Required

  1. Using the FIFO method, prepare appropriate purchases and sales journals to record these events.
  2. Prepare an appropriate inventory record for Product EF5089 for June, and post the journals prepared in requirement A above to the appropriate general ledger accounts (assuming that product EF5089 is the only product bought and sold by Tamworth Trading Ltd).
  3. Prepare an income statement for Tamworth Trading Ltd for June.

Product

FIFO Method

Purchases

Sales

Balance

Date

Explanation

Unit

Unit Cost

Total Cost

Unit

Unit Cost

Total Cost

Unit

Unit Cost

Total Cost

1/6

Balance

6100

$2.20

13420

4/6

Purchases

4600

$2.25

10350

6100

$2.20

13420

4600

$2.25

10350

9/6

Sales

4100

$2.20

9020

2000

$2.20

4400

4600

$2.25

10350

12/6

purchases

4100

$2.40

9840

2000

$2.20

4400

4600

$2.25

10350

4100

$2.40

9840

21/6

Sales

2000

$2.20

4400

3500

$2.25

1100

$2.25

2475

4100

$2.40

17715

24/6

Sales

2900

$2.25

6525

600

$2.25

4100

$2.40

11190

26/6

Purchases

3100

$2.50

7750

600

$2.25

4100

$2.40

3100

$2.50

18940

30/6

Sales

600

$2.25

1350

2100

$2.40

2000

$2.40

4800

3100

$2.50

12790

30/6

Missing inventory

50

$2.40

120

2050

3100

$2.40

$2.50

$12670

$28690

Sales Journal

Date

Account

Post Ref

Sales

GST payable

Receivable

Cost of sales

9/6

(4100 units @ $5)

ü

$20 500

$2 050

$22 550

$9 020

21/6

(3100 units @ $5)

ü

15 500

1 550

17 050

6 875

24/6

(2900 units @ $5)

ü

14 500

1 450

15 950

6 525

30/6

(2600 units @ $5)

ü

13 000

1 300

14 300

6 150

$63 500

$6 350

$69 850

28 570

(400)

(500)

Purchases Journal

Date

Account

Post Ref

Inventory

GST receivable

Payable

4/6

(4600 units @ $2.25)

ü

$10 350

$1 035

$11 385

12/6

(4100 units @ $2.40)

ü

9 840

984

10 824

26/6

(3100 units @ $2.50)

ü

7 750

775

8 525

$27 940

$2 794

$30 734

(500)

General Journal

30/6 Dr Inventory loss $120

Cr Inventory $120

Stocktake revealed that 50 units are missing

GENERAL LEDGER

Sales

No. 400

Date

Explanation

Post Ref.

Debit

Credit

Balance

June 30

Balance

SJ

$63 500

$63 500

Inventory

No. 500

Date

Explanation

Post Ref.

Debit

Credit

Balance

June 1

Balance

$13 420

30

Purchases

PJ

$27 940

41 360

30

30

Cost of sales

Missing inventory

SJ

GJ

28 570

120

12 790

12670

TAMWORTH TRADING LTD

Income Statement

for the month ended 30 June

INCOME

Sales

$63 500

Less: Sales returns and allowances

Net sales

63 500

Less: Cost of sales

Less: Inventory loss

28 570

120

GROSS PROFIT

34 810

LESS: EXPENSES

PROFIT

$34 810

Product

LIFO Method

Purchases

Sales

Balance

Date

Explanation

Unit

Unit Cost

Total Cost

Unit

Unit Cost

Total Cost

Unit

Unit Cost

Total Cost

1/6

Balance

6100

$2.20

13420

4/6

Purchase

4600

$2.25

10350

6100

$2.20

4600

$2.25

23770

9/6

Sales

4100

$2.25

9225

6100

$2.20

500

$2.25

14545

12/6

Purchases

4100

$2.40

9840

6100

$2.20

500

$2.25

4100

$2.40

24385

21/6

Sales

3100

$2.40

6100

$2.20

500

$2.25

1000

$2.40

16945

24/6

Sales

1000

$2.40

500

$2.25

1400

$2.20

4700

$2.20

10340

26/6

Purchases

3100

$2.50

7750

4700

$2.20

3100

$2.50

18090

30/6

Sales

2600

$2.50

6500

4700

$2.20

500

$2.50

11590

30/6

Missing inventory

50

$2.50

125

4700

$2.20

450

$2.50

$11465

$29895

Product

MAC Method

Purchases

Sales

Balance

Date

Explanation

Unit

Unit Cost

Total Cost

Unit

Unit Cost

Total Cost

Unit

Unit Cost

Total Cost

1/6

Balance

6100

$2.20

13420

4/6

Purchases

4600

$2.25

10350

10700

$2.22

23770

9/6

sales

4100

$2.22

9102

6600

$2.22

14668

12/6

Purchases

4100

$2.40

9840

10700

$2.29

24508

21/6

Sales

3100

$2.29

7099

7600

$2.29

17409

24/6

Sales

2900

$2.29

6641

4700

$2.29

10768

26/6

Purchases

3100

$2.50

7750

7800

$2.37

18518

30/6

Sales

2600

$2.37

6162

5200

$2.37

12356

30/6

Missing Inventory

50

$2.37

119

5150

$2.37

$12237

$29123

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