Question

Galaxy Productions’ fiscal year ended 31 December 2019. Their net profit was $2,796, the firms’ equity (new capital) was reduced from $50,000 to $32,796. The was also selling merchandises as part of their revenue. The firm bought a lighting machine for $8,000 in 2017, which has a lifespan of 4 years and its residual value was $500. The firm used the reducing balance method for depreciation. The firm has used Average Costing Method (AVCO) to obtain the closing stock which valued as $296.

The firm’s transactions are listed as follows:

Sales	$   30,000.00
Opening stock	$     2,000.00
Wages and salaries	$     9,200.00
Purchases	$   10,000.00
Overheads (inclusive of depreciation)	$     6,300.00
Lighting Machine (after depreciation)	$     2,000.00
Premise	$ 100,000.00
Short-term loan	$     1,000.00
Bank	$     2,000.00
Payables	$     2,000.00
Receivables	$     1,500.00
Capital	$   50,000.00
Drawings	$   20,000.00
Long term loan	$   70,000.00

Movement of the Inventory

Bought			Sold
Jan 2019	5 Boxes	$60 each	May 2019	4 Boxes	$4,500 each
Apr 2019	5 Boxes	$68 each	Nov 2019	12 Boxes	$1,000 each
Oct 2019	10 Boxes	$80 each

Instructions

1. Show the income statement and balance sheet with the data above.
2. You are now tasked to use another depreciation and stock valuation method other than what was used before and show a higher net profit in the income statement and higher equity in the balance sheet.
3. You are to do a new income statement and balance sheet and display both income statements and balance sheet (old and new) for comparison.

Answer 1

Income statement
op stock	2000	sales	30000
purchase	10000	closing stock	2960
wages and salaries	9200
gross profit	11760
	32960		32960
overheads	6300	gp b/d	11760
net profit	5460
	11760		11760
Balance sheet
Equity			Assets
capital	50000		NCA
drawings	-20000		machine	2000
np	5460	35460	premise	100000	102000
Liabilities
NCL			CA
loan	70000	70000	Rec	1500
			Bank	2000
CL			stock	2960	6460
loan	1000
payables	2000	3000
		108460			108460

Depreciation other method: straight line basis. In this method same amount of depreciayion will be charged. In reducing balane=ce method, depreciation amonut will vary according to the carrying value of the asset and this method produces a high amount of depreciation in initial years while SLM method allows a contsant depreciation.

Other method of valuation of closing stock is FIFO methd. This method will alloe closing inventory to value in the order of first in first out.