Question

Now that operations for outdoor clinics and TEAM events are running smoothly, Suzie thinks of another area for business expansion. She notices that a few clinic participants wear multiuse (MU) watches. Beyond the normal timekeeping features of most watches, MU watches are able to report temperature, altitude, and barometric pressure. MU watches are waterproof, so moisture from kayaking, rain, fishing, or even diving up to 100 feet won’t damage them. Suzie decides to have MU watches available for sale at the start of each clinic. The following transactions relate to purchases and sales of watches during the second half of 2019. All watches are sold for $307 each.

  

Jul. 17 Purchased 57 watches for $8,949 ($157 per watch) on account.
Jul. 31 Sold 47 watches for $14,429 cash.
Aug. 12 Purchased 47 watches for $7,849 ($167 per watch) cash.
Aug. 22 Sold 37 watches for $11,359 on account.
Sep. 19 Paid for watches ordered on July 17.
Sep. 27 Received full payment for watches sold on account on August 22.
Oct. 27 Purchased 87 watches for $15,399 ($177 per watch) cash.
Nov. 20 Sold 97 watches for $29,779 cash.
Dec. 4 Purchased 114 watches for $21,318 ($187 per watch) cash.
Dec. 8 Sold 47 watches for $14,429 on account.

1-a. Calculate sales revenue, cost of goods sold, and ending inventory as of December 31, 2019, assuming Suzie uses FIFO to account for inventory.
  

1-b. Prepare the gross profit section of a partial income statement for transactions related to MU watches.

2. Late in December, the next generation of multiuse (MU II) watches is released. In addition to all of the features of the MU watch, the MU II watches are equipped with a global positioning system (GPS) and have the ability to download and play songs and videos off the internet. The demand for the original MU watches is greatly reduced. As of December 31, the estimated net realizable value of MU watches is only $107 per watch.

a. Record any necessary adjustment on December 31, 2019, related to this information.

b. For what amount would MU inventory be reported in the December 31, 2019, balance sheet?

c. Prepare an updated gross profit section of a partial income statement accounting for this additional information.
  

Answer 1

1) a)

Calculation of Sales Revenue

Date	Units	value per watch	Total
31/7	47	307	14429
22/8	37	307	11359
20/11	97	307	29779
8/12	47	307	14429
		Total	69996

Calculation of Cost of Goods Sold & Closing Inventory as on 31/12/2019

Date	Transaction	Units	value per watch	Closing Units	Value per Watch	Closing Value
17/7	Purchase	57	157	57	157	8949
31/7	Sale(COGS)	47	157	-47	157	-7379
31/7	Closing Inv			10	157	1570
12/8	Purchase	47	167	10	157	1570
				47	167	7849
22/8	Sale(COGS)	37		-10	157	-1570
				-27	167	-4509
22/8	Closing Inv			20	167	3340
27/10	Purchase	87	177	20	167	3340
				87	177	15399
20/11	Sale(COGS)	97		-20	167	-3340
				-77	177	-13629
20/11	Closing Inv			10	177	1770
4/12	Purchase	114	187	10	177	1770
				114	187	21318
8/12	Sale(COGS)	47		-10	177	-1770
				-37	187	-6919
31/12	Closing Inv			77	187	14399

Total Cost of Goods Sold(COGS) = 7379+1570+4509+3340+13629+1770+6919=39116

Total Purchase = 8949+7849+15399+21318=53515

Closin Inventory Value = 14399

1)b)

Statemrnt of Gross Profit

Particulars	Amt(Dr)	Particulars	Amt(Cr)
Opening Stock	-	Sales	69996
Purchase	53515	Closing Stock	14399
Gross Profit	30880
Total	84395	Total	84395

2) a) As per IFRS, Inventory should be valued at lower of Cost or Net Realizable value.

Due to the release of multiuse(MU II) watches, the net realizable value of MU watches reduced to $ 107 per watch as compared to its cost $ 187, hence closing inventory should be valued at $ 107 and the difference of $ 80 shall be charged to the income statement

Inventory written off A/C Dr (80*77) 6160

To Closing Inventory 6160

b) Closing Inventory Value as at 31/12/2019 = 107*77 = $ 8239 or 14399-6160= $ 8239

c)

Statement of Gross Pofit

Particulars	Amt(Dr)	Particulars	Amt(Cr)
Opening Stock	-	Sales	69996
Purchase	53515	Closing Stock	8239
Gross Profit	24720
Total	78235	Total	78235