Australian

School of Business
ACCT1501 Accounting and Financial Management 1A Session 1 2013

TUTORIAL WEEK 9 Solutions to Preparation Questions

Preparation Questions
v DQ: 9.1, 9.2; 10.1, 10.2, 10.16; Problems 9.1, 9.5, & P10.2, 10.4; Case 10A (parts 1 6)

Discussion Questions 9.1 The periodic inventory system is a method of calculating inventory that uses data on beginning inventory, additions to inventory, and an end-of-period count to deduce the cost of goods sold. No records are maintained for individual inventory items. By contrast, the perpetual inventory system is a method of controlling inventory that maintains continuous records on the flow of units of inventory. 9.2 Under the perpetual inventory system, it 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 ending inventory and cost of goods sold are composed of a mixture of old and new items. At the time of sale, a record is made of the cost price of the goods based on the cost flow assumption. Thus the accounting records provide a record of the cost of goods sold. However under the periodic inventory system there is no continuous record of cost of goods sold. At the end of the accounting period it is calculated by adding purchases for the period to opening inventory and then deducting closing inventory. 10.1 The components of the cost of an asset include all those costs that are required to make it suitable for the purpose intended. 10.2 The purpose of depreciation is to allocate the cost of an asset as a deduction from profit over the useful life of the asset. 10.16 Depreciation has been defined as a process whereby the decline in service potential of an asset through wear, tear and obsolescence is progressively brought to account as a periodic charge against revenue.

In each period in which the asset is used to generate revenue, a portion of its cost is matched against that revenue, i.e., it is treated as depreciation expense. Cost is taken as the basis of depreciation numbers on the assumption that the acquisition cost of an asset reflects its value at the time of acquisition. Depreciation, as well as being an allocation of cost over the useful life of the asset, also reflects the decline in the value (= service potential) of the asset over its useful life. Value here implies value-in-use, i.e., the asset will be used in the ongoing operations of the entity viewed as a going concern, i.e., one, which is expected to continue its operations into the future. According to this view, if an asset is acquired to be used its exchange value (market selling price) is irrelevant by definition the asset was not acquired to be re-sold. Also, until the asset is sold then there is no transaction that can provide objective information as to its exchange value. On the other hand, the residual value of the asset is not depreciated. By definition, residual value refers to the value of the asset at the end of its useful life. At this stage the asset will be disposed of and its carrying amount is matched against any revenue from disposal. At this point it is its value in exchange rather than value in use which is relevant; so that it is appropriate that some portion of the cost of the asset remain unallocated so that it can be matched against revenue from disposal (if any).

Problem 9.1 1 Cost of goods sold under perpetual inventory system = 865 000 @ $5 = $4 325 000
2 Cost of goods sold under periodic inventory method:
Inventory at beginning Add: Purchases Deduct: Inventory at end Cost of goods sold $ 500 000 4 250 000 4 750 000 350 000 $4 400 000

3 In this case, the comparison of #1 and #2 shows that Razzmatazz has an inventory shortage: COGS should be $4 325 000 but based on the ending inventory count it would be deduced to be $4 400 000. The latter figure includes $75 000 of unexplained shortage. On a per-unit basis, only 865 000 units were sold, but 880 000 are gone: those 15 000 units represent lost income of $11.00 $5.00 = $6.00 each, for a total lost income of $90 000. So it appears that Razzmatazz needs better control over its inventory. Whether a perpetual inventory system is the answer, or rather just better physical control to stop theft or losses of units, is not clear from the sparse data. A perpetual system does not prevent loss, as we can see here, because such a system is being used and there are still losses, but it does identify loss, and management may feel that information (and the threat of discovery to anyone tempted to steal) is worth the cost. Such cost may be relatively high (fairly small-value items and fairly large volume), but the losses are fairly high too.

Problem 9.5
1 (1500 x 11) + (900 x 12) + (400 x 14) = $32 900 Note: Since FIFO is being used, the answer is the same irrespective of whether a perpetual or periodic system is being employed. 2 (200 x 15) + (1500 x 13) + (200 x 14) = $25 300 3 Sales (300 x 15) + (1800 x 15) + (700 x 17) = $43 400 Less: Cost of goods sold $32 900 $10 500 4 The gross profit is unchanged as the increased purchase only affects ending inventory.

Problem 10.2
1 a Van $20,000 + $5,000 + $1,000 = $26,000 (Costs of making ready for use). b Cost not market value, i.e. $3,200 2 a Van- cost is $26,000, residual value is $800, will last for 4 years, straight line depreciation (26,000 800) 4 = $6,300. b Rollers will last for 2 years, bought the paint roller on 1 April and the year ending is 31 December 2012 Year 1: 9/12 x 50% x 3,200 = 1,200. c Three year licence but purchased on 1 February, therefore 11/36 amortisation $1,375 is the amortisation expense.

3 Property, Plant and Equipment Property, Plant and Equipment Intangible Assets

Problem 10.4
1 2 3 Total cost of the asset = $1,000,000 + $7,500+ $18,000 = $1,025,500 Depreciation expense = $1,025,500/10 = $102,550 Accumulated depreciation = $102,550*2 = $205,100

CASE 10A parts 1 to 6

1 Land Land is not depreciated (Note 1G). 2 Buildings Buildings are depreciated (Note 10). 3 Total depreciation and amortisation for the year $857.9 million (Note 2c). 4 Accumulated depreciation and amortisation: (Note 10) 2011 2010

Accumulated depreciation on development properties Accumulated depreciation on freehold warehouse, retail and other properties Accumulated amortisation of leasehold improvements Accumulated depreciation on plant and equipment Increase = $624.8 million

12.9 91.3 802.9 6,089.4 6,996.5

18.6 101.1 719.5 5,532.5 6,371.7

5 The answers to 3 and 4 are not the same because property, plant and equipment were sold during the year. 6 Method of cost allocation to determine depreciation: straight-line basis (Note 1G).