Question

B. GoGolf Ltd sells one type of golf cart. Its financial year ends on the 30 June and it commenced the financial year with 40 golf carts that cost $2200 each. GoGolf uses the FIFO method and had the following transactions throughout the financial year. (i) On 30 July it acquired 35 golf carts on credit at $2250 each. (ii) On 4 August it paid for the purchase made on 30 July and received a 2.5% discount for early payment. (iii) On 28 August it sold 50 golf carts for $2900 each on credit terms 2/10, n/30. (iv) On 5th September received payment for the golf carts sold on 28th August. (v) On 23 September it acquired on credit 40 golf carts for $2260 each, less trade discount 3%. (vi) On 1 November GoGolf paid for the purchases made on 23 September. Because of the late payment they were charged an administration fee of 1.5%. (vii) On 24 December 25 golf carts were sold for cash for $2875 each. (viii) On 2nd January 1 of the golf carts sold on 24 December was returned because it as the wrong colour. No replacement was made and it was returned to stock. (ix) On 1 March GoGolf purchased on credit another 50 golf carts for $2000 each from a new supplier in China. No trade discount was received. (x) On 5 March 4 of the carts purchased on 1 March were returned when the wheels fell off. No replacements were ordered. (xi) On 30 June it was assessed that there was downturn in the demand for these golf carts and the net realisable value of the golf carts on hand was assessed as $1900. Required: (a) Why might GoGolf Ltd have chosen to use the net realisable value of the lounges in the transaction (xi) rather than lower of cost? (b) Using the periodic system of accounting, provide the journal entries for the above transactions and determine the balance of cost of goods sold and value of closing inventory for the year. (c) Using the perpetual system of accounting, provide the journal entries for the above transactions and determine the balance of cost of goods and value of closing inventory for the year if a stocktake revealed that 5 golf carts from the last order purchased were missing from the warehouse presumed stolen. (d) Which inventory method (periodic or perpetual) is preferable and why?

Answer 1

Answer to part (a)

It will be true and fair that the closing stock is calculated on Net reliazable value or the cost which ever is lower. Here the company is valuing the closing stock on net reliazable value because net reliazable value is lower than the cost.

Answer to part (b)

Journal entries for the transactions executed by the company -

Date	Particulars	Debit	credit
30-Jul	purchase of golf carts	76781.25
	To creditors		76781.25
	( Being 35 golf carts purchased @ 2250 and availed discount @ 2.5 %)
04-Aug	Creditors	76781.25
	To cash		76781.25
	( being amount paid )
28-Aug	Debtors	145000
	To golf carts sold		145000
	( being 50 carts sold @ 2900 )
05-Sep	Discount	2900
	To debtors		2900
	( Being discount given as per the terms
05-Sep	Cash	142100
	To debtors		142100
	( Being cash received from the debtors )
23-Sep	purchase of golf carts	87688
	To creditors		87688
	( Being 40 carts purchased @ 2260 and availed discount @ 3% )
01-Nov	Creditors	87688
	To cash		87688
	( being amount paid )
01-Nov	Administration charges	1315.32
	To creditors		1315.32
	( being amount due )
01-Nov	Creditors	1315.32
	To cash		1315.32
	( Being administration charges paid )
24-Dec	Debtors	71875
	To golf carts sold		71875
	( being 25 carts sold @ 2875 )
01-Jan	Sale return of golf carts	2875
	To debtors		2875
	( Being return of cart recorded )
01-Mar	purchase of golf carts	100000
	To creditors		100000
	( Being 50 golf carts purchased @ 2000 each )
05-Mar	Creditors	8000
	Purchase return		8000
	( Being 4 golf carts returned to the vendor )

Valuation of the cost of goods sold -

Details of the cost of goods sold
Date	Quantity sold	Rate	Amount
28-Aug	50	40 @ 2200	88000
		10 @ 2193.75	21937.5
24-Dec	24	2193.75	52650
Value of the cost of goods sold	162587.5

Valuation of the closing stock -

S.No.	Quantity	Rate	Amount
1	40	2260	90400
2	1	2250	2250
3	46	2000	92000
Total	87		184650

Answer to part ( C )

Valuation of closing stock under perpetual method -

Particulars	Units
Closing inventory	87
Less : Stolen goods	5
Net closing inventory	82
Valuation of closing inventory	164000

Closing inventory is valued at the last purchase price i.e., 2000

Answer ( D )

For the golf carts inventory valuation is will be preferable to follow the FIFO method over perpetual method of the company. The FIFO method provides true and fair view in the financial statements of the company.