Current & Non Current Assets

INVENTORY – PERIODIC INVENTORY SYSTEM In a Periodic Inventory System, no effort is made to keep up – to – date records of either the inventory or the cost of goods sold. Instead, these amounts are determined only periodically __ usually at the end of each year. It is used by very small businesses having manual accounting systems. Questions 1 – 3 (Meigns & Meigns), Question 4 (Fess & Warren) Question 1:- Mach IV Audio uses periodic inventory system. One of the store’s most popular products is a minidisc car stereo system. The inventory quantities, purchases, and sales of this product for the most recent year are as follows: Number of units| Cost per unit| Total Cost| Inventory – Jan 01| 10| Rs. 299| Rs. 2990| Purchases – May 12| 15| 306| 4590| Purchases – July 09| 20| 308| 6160| Purchases – Oct 04| 8| 315| 2520| Purchases – Dec – 18| 19| 320| 6080| Goods available for sale| 72| | Rs. 22340| Units sold during the year| 51| | | Inventory| 21| | | Instructions: Compute the cost of December 31 inventory and the cost of goods sold for the above mentioned product under each of the following cost flow assumptions: a.First-in, first-out b. Last-in, first-out c. Average cost (round to the nearest rupee, except unit cost) Question 2: – Same three inventory valuation methods under periodic inventory system | Number of units| Cost per unit| Total Cost| Inventory – Jan 01| 9| Rs. 3. 00| Rs. 27. 00| Purchases 1| 12| 3. 50| 42. 00| Purchases 2| 30| 3. 80| 114. 00| Purchases 3| 40| 4. 00| 160. 00| Purchases 4| 19| 5. 00| 95. 00| Goods available for sale| 110| | Rs. 438. 00| Units sold during the year| | | | Inventory – Dec 31| 20| | |Question 3: – Same three inventory valuation methods under periodic inventory system | Number of units| Cost per unit| Total Cost| Beginning Inventory | 10| Rs. 80| Rs. 800| First Purchases (Mar. 1)| 5| 90| 450| Second Purchases (July 1) | 5| 10 0| 500| Third Purchases (Oct. 1) | 5| 120| 600| Fourth Purchases (Dec. 1) | 5| 130| 650| Goods available for sale| 30| | Rs. 3,000| Units in ending inventory| 12| | | Units sold| 18| | | Question 4: – Stewart Co. ’s beginning inventory and purchases during the fiscal year ended March 31, 2012, were as follows: | | Units| Unit Cost Rs. Total Cost Rs. | April 01, 2011| Inventory| 1,000| 50. 00| 50,000| April 10, 2011| Purchases| 1,200| 52. 50| 63,000| May 30, 2011| Purchases| 800| 55. 00| 44,000| Aug 26, 2011| Purchases| 2,000| 56. 00| 112,000| Oct. 15, 2011| Purchases| 1,500| 57. 00| 85,500| Dec. 31, 2011| Purchases| 700| 58. 00| 40,600| Jan. 18, 2012| Purchases| 1,350| 60. 00| 81,000| March 21, 2012| Purchases| 450| 62. 00| 27,900| Total| | 9,000| | 504,000| Stewart Co. uses the periodic inventory system, and there are 3,200 units of inventory on March 31, 2012.Determine the cost of ending inventory using the three costing methods. Practice Question (Fees & Warren) Exe r. 10-3 Page 366| Exer. 10-4 Page 366| Prob. 10-3A Pg. 369| Prob. 10-3B Pg 374| INVENTORY – PERPETUAL INVENTORY SYSTEM In a Perpetual Inventory system, merchandising transactions are recorded immediately as they occur. The system draws its name from the fact that the accounting records are kept perpetually up – to – date. This system is very easy to use. It is cost effective, & thus widely used because of the growing use of computerized accounting.Question 1: – World Class Grocery Wholesalers performed the following transactions, all on credit, and all related to a particular chocolate bar. July 01 Beginning Inventory 23 units of Rs. 4 each. July 02 Purchased 57 units of Rs. 5 each. 12 Purchased 51 units of Rs. 8 each. 13 Sold 60 units for Rs. 12 each. 18 Sold 20 units for Rs. 12 each. 22 Purchased 26 units of Rs. 9 each. 26 Sold 18 packs for Rs. 15 each. Instructions for Questions 1, 2 & 3: – a) Prepare the Inventory Subsidiary Ledger and, b) Give the journal entries to record the Purchases, the Cost Goods Sold and the Sales assuming that the wholesalers uses . First-in, First-out Method (FIFO) 2. Last-in, First-out Method (LIFO) 3. Average Cost Method Question 2: – Sohail Books deals with school books. This question is related to Credit purchases and sales of Urdu Qaida for class 1. March 04 Purchased 100 copies for Rs. 12 each. 11 Sold 35 copies for Rs. 17. 18 Purchased 80 copies for Rs. 13 each. 19 Sold 40 copies for Rs. 19 each. 27 Sold 41 copies for Rs. 20 each. Question 3: – Noman Company Inventory & Sales Data Month Ended January 31, 2010 Date| Description| Units| Unit Cost Rs. | Date| Des| Units | Unit Cost Rs. Jan 01 12 15 18 | Beg. InventoryPurchasesSalesPurchases | 50 100 50 200 | 1. 00 1. 50 2. 00 | Jan 20 22 27 30| PurchasesSalesPurchasesSales| 100150 50 80| 2. 50 4. 00| Practice Question (Fees & Warren) Exer. 10-5 Page 366| Exer. 10. 6 Page 366| Prob. 10-4A Pg. 369| Prob. 10-4B Pg 374| Practice Qu estion (Meigs & Meigs – 13th Edition) Exer. 8. 2 Page 351| Prob. 8. 1 Page 356| Prob. 8. 2 Page 356| _____________________________ Perpetual Inventory SystemInventory Subsidiary Ledger ( ) Date| Purchased| Sold| Balance| | Units| UnitCost Rs. | TotalCostRs. | Units| Unit CostRs. | TotalCostRs. | Units| UnitCostRs. | TotalCostRs. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6 (Photocopies) of this page, if you don’t want to make this format 6 times in your register SUMMARY OF THE JOURNAL ENTRIES MADE IN PERPETUAL AND PERIODIC INVENTORY SYSTEM Event| Perpetual Inv. System| Periodic Inv.System| Purchasing inventory| Inventory Accounts Payable (or Cash)To record the purchase of inventory| Purchases Accounts Payable (or Cash)To record the purchase of inventory| Sale of Inventory| Accounts Receivable (or Cash) SalesTo record the sale of inventoryCost of Goods Sold InventoryTo upd ate Cost of Goods sold and inventory accounts| Accounts Receivable (or Cash) SalesTo record the sale of inventory(In the periodic inventory system, no entry is made at the time of sales to update Cost of Goods sold and inventory accounts. | Settlement of A/Payable to suppliers| Accounts Payable CashTo record payment for inventory purchased on credit| Accounts Payable CashTo record payment for inventory purchased on credit| Collection from credit customers| Cash Accounts ReceivableTo record cash collection from credit customers. | Cash Accounts ReceivableTo record cash collection from credit customers. | Income Statement of a Service Business: – Revenue – Expenses = Net Income Income Statement of a Merchandising Business Delta TradersIncome Statement For the year ended December 31, 2011 Sales Rs. 6, 000 Less: Sales Returns 1, 000 Net Sales 5, 000 Less: Cost of Goods Sold 1, 150 Gross Profit 3, 850 Less: Operating Expenses Salaries Expense Rs. 00 Utility Expense 100 Depr eciation Expense – machine 50 650 Net Income 3, 200 HOW TO CALCULATE COST OF GOODS SOLD Inventory – Jan 01 ————————-Add: Purchases ———————— Carriage Inwards —————-Less: Purchases Returns —————- Purchases Discount —————- Net Purchases ———————Cost of goods available for sale ——–Less: Inventory – Dec 31Cost of Goods Sold| 55050| Rs. 00 (100)(50)| Rs. 10004501450(300)1150| Questions 1 & 2 The data of two questions is given below. Prepare a Trading Account for the year ended Dec 31 Sales| Rs. 10, 600| | Sales| Rs. 210, 420| Sales Returns| 1, 200| | Sales Returns| 4, 900| Inventory – Jan 01| 5, 000| | Inventory – Jan 01| 9, 410| Purchases| 3, 500| | Purchases| 108, 680| Ca rriage Inwards| 500| | Carriage Inwards| 840| Purchases Returns| 400| | Purchases Returns| 3, 020| Purchases Discount| 200| | Purchases Discount| 700|Inventory – Dec 31| 2, 500| | Inventory – Dec 31| 11, 290| FORMATS OF FINANCIAL STATEMENTS Delta Traders Income Statement For the year ended December 31, 2011 | Rs. | Rs. | Rs. | Sales | | 6, 000| | Less: Sales Returns | 700| | | Sales Discount| 300| 1, 000| | Net Sales | | | 5, 000| LESS : COST OF GOODS SOLD| | | | Inventory – Jan 01| | 1, 000| |Add: Purchases| 550| | | Carriage Inwards| 50| | | | 600| | | Less: Purchases Returns| (100)| | | Purchases Discount| (50)| | | Net Purchases| | 450| | Cost of goods available for sale| | 1, 450| | Less: Inventory – Dec 31| | (300)| 1, 150| Gross Profit| | | 3, 850| Less : Operating Expenses| | | | Salaries Expense| | 500| | Utilities Expense| | 100| | Depreciation Expense – machine| | 50| 650| Net Profit| | | 3, 200| | | | | | Delta Traders Statement of Fina ncial Position December 31, 2011AssetsCurrent Assets Cash ————————– Accounts Receivable ————- Repair Revenue Receivable ——- Inventory ————————- Supplies ————————- Prepaid Insurance —————- Total Current Assets ———–Plant Assets Land ——————————— Shop ——————————— Less: Accumulated Depreciation Machine ————————–Less: Accumulated Depreciation Total Plant Assets ————-TOTAL ASSETS ——————Liabilities & Owner’s EquityLiabilities A ccounts Payable —————- Unearned Repair Revenue ——- Total Liabilities —————Owner’s Equity Capital (Dec 31, 2011) ———— TOTAL LIABILITIES & OWNER’S EQUITY ——- | Rs. ——————————————————————————————————– ————— 5,000 2,700 3,000 1,400———————————————————————————————————| Rs. 3,700 1,000 800 300 500 1,300————- 1 0,000 2,300 1,600————————–3,2004,440 ————————————| Rs. 7, 60013,90021,500 7,640 13,860 21,500| Question 1:- The following trial balance was extracted from the books of F. Bell on December 31, 2011. Draw up his Income Statement for the year ended December 31, 2011, and a Balance Sheet as at that date Debit Rs. | Credit Rs. | Sales| | 210, 420| Purchases| 108, 680| | Inventory: Jan 1, 2011| 9, 410| | Carriage Outwards| 1, 115| | Carriage Inwards| 840| | Return Inwards| 4, 900| | Return Outwards| | 3, 720| Salaries & Wages Expense| 41, 800| | Fuel Expense| 912| | Rent Expense| 6, 800| | General Expenses| 318| | Motor Vehicle| 14, 400| | Allowance for Depreciation – motor vehicle| | 520| Fixtures & Fittings| 912| | Accounts Receivable| 23, 200| | Accounts Payable| | 13, 580| Cash| 24, 780| | Drawings| 9, 000| | Capital| | 18, 827| | 24 7, 067| 247, 067| Inventory at December 31, 2011 was Rs. 11, 290 NON – CURRENT ASSETS 1. TANGIBLE ASSETSPlant assets / Property, Plant & Equipment / Fixed Assets / Non Current Assets FIRST STAGE: – AQUISATION OF PLANT ASSETS Question 1: – Wilmet College recently purchased new computing equipment for its library. The following information refers to the purchase and installation of this equipment: 1. The list price of the equipment was $275, 000; however, Wilmet College qualified for an education discount of 25, 000. 2. Wilmet paid sales tax of $15, 000 at the date of purchase. 3. Freight charges for delivery of the equipment totaled $1, 000. 4. Installation costs related to the equipment amounted to $5, 000. 5. During installation, one of the computer terminals was accidentally damaged by a library employee. It cost the college $300 to repair this damage. 6.As soon as the computers were installed, the college paid $4, 000 to print admission brochures, featuring t he library’s new, state-of-the-art computing facilities. Instructions: – a. Compute the total cost debited to the college’s Computing Equipment account. b. Prepare a journal entry at the end of the current year to record depreciation on the computing equipment. Wilmet College will depreciate this equipment by the straight line method (half-year convention) over an estimated useful life of 5 years. Assume a zero residual value. (Meigs & Meigs – Problem 9. 1 / Page 402 For Practice: – Fees & Warren – Exercise 11-1 / Page 404 SECOND STAGE: – DEPRECIATION OF PLANT ASSETSQuestion 2: – On January 2, 2005, Jansing Corporation acquired a new machine with an estimated useful life of 5 years. The cost of the machine was $40, 000 with an estimated residual value of $5, 000. The depreciation rate per year is 40 %. a. Prepare a complete depreciation table under the two depreciation methods listed below. Assume that a full year of depreciati on was taken in 2005. 1. Straight-line 2. Declining balance method (Depreciation Rate per year is 40 %) (Meigs & Meigs – Exercise 9. 4 / Page 400) Question 3: – On August 3, 2000, Srini Construction purchased special-purpose equipment at a cost of $1, 000,000.The useful life of the equipment was estimated to be 4 years, with a residual value of $50, 000. The depreciation rate is 50 % per year & half year convention is to be used. a. Compute the depreciation expense to be recognized each calendar year for financial reporting purpose under the straight-line depreciation method. b. Compute the depreciation expense to be recognized each calendar year for financial reporting purpose under the declining balance method with the per year depreciation rate of 50 % (Meigs & Meigs – Exercise 9. 3 / Page 400) For Practice: – Fees & Warren – Exercises 11-5, 11-6 & 11-7 / Page 405 Meigs & Meigs – Problems 9. 2 & 9. 3THIRD STAGE: – DISPOSAL OF PLANT ASSETS Question 4: – During the current year, Ramirez Developers disposed of plant assets in the following transactions: Feb 10Office equipment costing Rs. 26, 000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the equipment amounted to Rs. 25, 800. Apr 01Ramirez sold land and a building to Claypool Associates for Rs. 900, 000, receiving Rs. 100, 000 cash and a five year, 9 percent note receivable for the remaining balance. Ramirez records showed the following records: Land Rs. 50, 000; Building, Rs. 550, 000; accumulated depreciation: Building (at the date of disposal), Rs. 250, 000.Aug 15 Ramirez traded-in an old truck with a new one. The old truck had costRs. 26, 000, and its accumulated depreciation amounted to Rs. 18, 000. The list price of the new truck was Rs. 39, 000, but Ramirez received a Rs. 10, 000trade-in allowance for the old truck and paid Rs. 29, 000 in cash. Ramirez includes trucks in its Vehicle account. Oct 0 1Ramirez traded in its old computer system as part of the purchase of a new system. The old system had cost Rs. 15, 000, and its accumulated depreciation amounted to Rs. 11, 000. The new computer’s list price was Rs. 8, 000. Ramirez accepted a trade-in allowance of Rs. 500 for the old computer system, paying Rs. , 500 down in cash, and issuing a 1-year, 8 percent note payable for the Rs. 6, 000 balance owed. Instructions: – Prepare journal entries to record each of the disposal transactions. (Meigs & Meigs – Problem 9. 4 / Pg 404) For Practice: – Fees & Warren – Ex. 11-12 & Ex. 11-13 Question 5: – On January 5, 2005, a machine was bought by J & P Traders at a list price of Rs. 43,000. The cost of its carriage in was Rs. 800, installation and testing charges were Rs. 4,200 Its estimated useful life is 4 years and its estimated residual value is Rs. 2, 000. Instructions: a. Calculate the cost price of the machine and give a proper journal entr y of the acquisition of the tangible asset. b.Calculate the per year depreciation expense using the straight line method. c. Prepare the depreciation schedule for all the four years. d. Give the adjusting entries to record depreciation for the last useful year. e. After its useful life, the machine was traded-in for a new machine. The new machine’s list price was Rs. 58, 000. J & P Traders accepted a trade-in allowance of Rs. 3, 000 for the old machine, paying Rs. 9, 000 down in cash, and issuing a 1-year, 8 percent note payable for the Rs. 46, 000 balance owed. 2. INTANGIBLE ASSETS Similarities between Tangible and Intangible assets 1. Plant Assets 2. Long Lived 3. Recorded at cost 4. Cost is expensed over useful life in a systematic manner.For Intangible assets, Straight line method over 40 years is followed. 5. At disposal, the book value is eliminated, gain / loss is recorded. Differences S. No| TANGIBLE ASSETS| INTANGIBLE ASSETS| 1. | Has physical existence| Has no physi cal existence| 2. | Term â€Å"Depreciation† is used. | Term â€Å"Amortization† is used. | 3. | Cost Price = list price + all other necessary expenses. | Cost Price = Purchase Price only| 4. | Depreciation period depends upon the estimated useful life. | Amortization period cannot be longer than 40 years. | 5. | Depreciation Expense-equip Accumulated Depreciation-Equip| Amortization Expense Patent|Intangible Assets are rights and privileges that result from the ownership of long lived assets that don’t possess physical substance. 1. GOODWILL * Largest Intangible asset on company’s balance sheet under the head of Intangible assets. * Recorded when transaction involves purchase of entire business. Here goodwill is the excess of cost over fair market value of net assets. (assets less liabilities) acquired. * Value of all favorable attributes that relates to a business. Includes 1. Exceptional management 2. Desirable location 3. Good customers relations 4. S killed employees 5. High quality products 6. Manufacturing efficiency 7. Weak Competition 2. PATENTS A right by the government to manufacture, use and sale of a product. * To encourage invention of a new product. * When patent is purchased from the inventor, purchase price is debited by the account title of Patents. * Are granted for 17 years (legal life). * Obsolesce may cause patent to be economically ineffective. 3. TRADE MARK / TRADE NAME * Name, symbol or distinctive design that identifies a business and a product. * Permanent exclusive right to use a trademark, brand name, commercial symbol. Is obtained by registering it with the government. * For a purchased trademark, cost is substantial and amortized over 40 years. * Is renewable. 4. FRANCHISE It is the right granted by the company to conduct a certain type of business in a specific geographical area. * Cost is quite substantial * Small cost – Amortized over a short period of 5 years. * Material cost – 40 year s. Amortization should be based on the life of the franchise. 5. COPYRIGHTS * Exclusive rights granted by the government to protect the production and sale of literary or artistic material for the life of the creator plus 50 years. NATURAL RESOURCES Examples: – Oil & Gas Reserves, gold, copper, coal mines, timber (forests), etc. As long as this asset is present in its natural environment, it is regarded as Property, Plant & Equipment.Once it is removed from its natural environment, it becomes inventory, i. e. a current asset. Question 1: – Rainbow Minerals paid Rs. 45, 000, 000 (Rs. 45 million) to acquire the Super Coal Mine, which is believed to contain 10 million tons of coal. The residual value of the mine after all of the coal is removed is estimated to be Rs. 5 million. Working: – Cost – Estimated Residual Value = Depletion Expense per ton Estimated Production In tons 45 million – 5 million = Rs. 4 Depletion Expense per ton 10 million Suppose in the first year, 2 million tons of coal was mined, the entry to record depletion would be 2010Debit (Rs) Credit (Rs) Dec 31 Inventory 8, 000, 000 Accumulated Depletion: Super Coal Mine 8, 000, 000 To record depletion of the Super Coal Mine for the year. (2, 000, 000 tons mined @ Rs. 4 per ton) Balance Sheet (extract) of Rainbow Mineral Property, Plant & Equipment Mining Properties: Super Coal Mine Rs. 45, 000, 000 Less: Accumulated Depletion 8, 000, 000 Rs. 37, 000, 000 (Meigs & Meigs, Page 389) Out of 2 million tons, 75, 000 tons of coal was sold. Record the Cost of Goods Sold.Cost of Goods Sold 300, 000 Inventory 300, 000 To record the cost of goods sold Question 2: – Salter Mining Company purchased the Northern Tier Mine for Rs. 21 million cash. The mine was estimated to contain 2. 5 million tons of copper and to have a residual value of Rs. 1 million. During the first year of mining operations at the Northern Tier Mine, 50, 000 tons of copper were mined of which 40, 00 0 tons were sold. Instructions: – a. Compute depletion expense per ton. Prepare a journal entry to record depletion during the year. b. Show how the Northern Tier Mine, and its