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Perpetual inventory system:
COGS = 2,000 units x $8 each = $16,000
Inventory loss = 1,000 x $8 each = $8,000
We know there is an inventory loss because according to our
records ending stock in units should be10,000 – 2,000 + 6,000 =
14,000 units. But the stocktake has found only 13,000 units
Periodic inventory system:
COGS = opening + purchases – stock =$80,000 + $48,000 – $104,000
= $24,000
Any stock losses are subsumed into COGS. We would be unaware of
the amount of stock losses because the periodic inventory system
does not produce this information.
Under either method is necessary to make an assumption regarding
the flow of costs through the business, for example, whether the
first items acquired are the first ones sold or whether
endinginventory and cost of goods sold are composed of a mixture of
old and new items.
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Problem 9.3 – Frog Ltd
1. a. Perpetual inventory system
General journal$ $
Credit purchases of inventory during the period Inventory 120
000
Accounts payable 120 000
Sales on credit during the period Accounts receivable 210
000
Sales revenue 210 000
Cost of goods sold at 50% mark-up, 210 000 ÷ 1.5 = $140 000Cost
of goods sold 140 000
Inventory 140 000
Shortage: records indicates inventory should be $20 000 but$19
800 is on hand
Inventory shortage expense 200
Inventory 200
Expenses paid in cashOperating expenses 35 000
Cash 35 000
Closing entriesSales revenue 210 000
Profit and loss summary 210 000
Profit and loss summary 175 200Cost of goods sold expense 140
000Inventory shortage expense 200Operating expenses 35 000
Profit and loss summary 34 800Retained profits 34 800
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1. b. Periodic inventory system
General journal$ $
Transfer opening inventory to COGS***COGS – Opening inventory 40
000
Inventory 40 000
Credit purchases of inventory during the periodCOGS - Purchases
120 000
Accounts payable 120 000
Recognise closing inventory***
Inventory 19 800COGS – Closing inventory
19 80019 800
Sales on credit during the periodAccounts receivable 210 000
Sales revenue 210 000
Expenses paid in cashOperating expenses 35 000
Cash 35 000
Closing entriesSales revenue 210 000COGS – Closing inventory 19
800
Profit and loss summary 229 800Profit and loss summary 195
000
COGS – Purchases 120 000Operating expenses 35 000COGS – Opening
inventory 40 000
Profit and loss summary 34 800Retained profits 34 800
*** The two journals for the opening and closing inventory are
taken directly to profit and loss summaryin the textbook. Students
should recall that under the periodic system there is no running
record of theinventory balance. The closing inventory has to be
journalised as shown here.
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2. a. Perpetual inventory
Frog LtdIncome Statement for year ended 30 June 2016
$ $Sales 210 000Less: Cost of goods sold 140 000
Inventory shortage 200 140 200Gross profit 69 800Less: Operating
expenses 35 000
Net profit 34 800
2. b. Periodic inventory
Frog LtdIncome Statement for year ended 30 June 2016
$ $Sales 210 000Less: Cost of goods sold
Inventory 1 July 2011 40 000Purchases 120 000Available for sale
160 000Less: Inventory 30 June 2012 19 800
Cost of goods sold 140 200Gross profit 69 800Less: Operating
expenses 35 000
Net profit 34 800
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Problem 9.7 – Dizzy Lizzy
1. Calculation of COGS
a Perpetual FIFO
COGS = 60 x $5 + (50 x $5 + 70 x $6) + (10 x $6 + 80 x $7) =
$1590
Closing inventory = 30 x $7 + 100 x $8 = $1010
Date In Out Balance
$ $ $ $ $ $
1.1.12 Balance 110 5 550
10.2.12 Purchase 80 6 480 110 5 550
80 6 480
14.4.12 COGS 60 5 300 50 5 250
80 6 480
9.5.12 Purchase 110 7 770 50
80
110
5
6
7
250
480
770
24.7.12 COGS 50
70
5
6
250
420
10
110
6
7
60
770
21.10.12 Purchase 100 8 800 10 6 60
110 7 770
100 8 800
12.11.12 COGS 10 6 60 30 7 210
80 7 560 100 8 800
2,050 1,590 1,010
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b Perpetual LIFO
COGS = 60 x $6 + (110 x $7 + 10 x $6) + 90 x $8 = $1910
Closing inventory = 110 x $5 + 10 x $6 + 10 x $8 = $690
Date In Out Balance
$ $ $ $ $ $
1.1.12 Balance 110 5 550
10.2.12 Purchase 80 6 480 110 5 550
80 6 480
14.4.12 COGS 60 6 360 110 5 550
20 6 120
9.5.12 Purchase 110 7 770 11020
110
56
7
550120
770
24.7.12 COGS 110
10
7
6
770
60
110
10
5
6
550
60
21.10.12 Purchase 100 8 800 110 5 550
10 6 60
100 8 800
12.11.12 COGS 90 8 720 110 5 550
10 6 6010 8 80
2,050 1,910 690
Useful tip: calculating that the total cost of goods available
for sale was $550 +$ 2,050 = $2600allows checking that COGS +
Closing Inventory equals $2600.
2. Net realisable value
Only closing inventory is adjusted – the net realisable value is
designed to prevent companiesoverstating inventory.
Therefore under both FIFO and LIFO, Closing inventory should be
$650 (130 x $5).
FIFO Closing inventory should be reduced by $360
LIFO Closing inventory should be reduced by $40.
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DQ 10.14 – Depreciation expense and accumulated depreciation
Accumulated depreciation is a contra-asset. It shows the extent
to which the cost of anon-current asset has already been
depreciated at period end. Accumulated depreciation is anestimate
of the extent to which the gross amount of depreciable assets (e.g.
cost) have been used
up. It is more appropriate to recognise as a contra account
given that accumulated depreciation isan estimate.
You may get some idea as to the age of the assets, how worn-out
they are, and whether many ofthe assets will need to be replaced
soon. It is possible to have a better understanding of changesin
the productive capacity of the firm. (Depreciable) assets are
usually much more important tothe company, and in evaluating it,
than are things like prepaid expenses.
Problem 10.12 – Yip Ltd
The cost and depreciable amount of the additional equipment
purchased is calculated as follows:$
Price 120 000Less: Trade discount of 25% 30 000
90 000Freight charges 7 500Installation and testing 2 500Cost
100 000
Less: Salvage value 3 125Depreciable amount 96 875
Depreciation for the ‘year’ ended 30 June 2016 is calculated as
follows:
1 Reducing balance:
$100 000 50% 6
12 months = $25 000
2 Straight-line:$96 875 20%
612
months = $9 687.5
3 Units-of-production method:
$96 875 70 000775 000
,,
= $8 750
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Problem 10.17 – Quick Express
1 Dr Cash $8,000Dr Accumulated depreciation $39,000
Cr Delivery truck – at cost $47,000
Gain/(Loss) on sale = proceeds less asset book value = $8,000 –
($47,000 – $39,000) = $Nil
2 Dr Cash $9,000Dr Accumulated depreciation $39,000
Cr Gain on sale $1,000Cr Delivery truck – at cost $47,000
Gain/(Loss) on sale = proceeds less book value = $9,000 –
($47,000 – $39,000) = $1,000 gain
3 Dr Cash $7,100Dr Accumulated depreciation $39,000Dr Loss on
sale $900
Cr Delivery truck – at cost $47,000
Gain/(Loss) on sale = proceeds less book value = $7,100 –
($47,000 – $39,000) = ($900) loss
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