Question

Q) Company S is a retailer of 3 goods. At year end, the company's closing inventory consists of the following:

Product

Y1: $3400 (cost), $3500 (price)

Y2: $9200 (cost), $10800 (price)

Y3: $1600 (cost), $1400 (price)

Additional marketing fees is 4 % of selling price and have to paid by Company S in order to sell goods. These costs have not beng factored into the selling prices stated above.

What is the total value of inventory in company's accounting records? Choose from the below ans provided:

A1) $15700

A2) $13904

A3) $15072

A4) $14200

Q2) Repaying a bank loan by issuing shares will? Choose from below ans provided.

A1) Have no effect on equity

A2) Have no effect on total assets

A3) Decrease liabilties but increases assets

A4) Decrease both liabilities and equity

Q3) Heyhey Ltd have the following transactionfor inventory for year 2017

1 Jan: Opening balance of 25 units at $10 each

16 Mar: Purchase of 10 unit at $12

2 May: Sale of 28 units

21 July: Purchase of 15 units at $14

18 October: Sales of 18 units

23 December: Purchase of 13 units at $16 each

Under perpetual weighted average method, costs of goods sold for the year would be:

Choose from the below ans:

A1) $575.46

A2) $651.26

A3) $525.34

A4) $624. 65

It is best if you can provide some workings.

Thank you!

Answer 1

1) Closing Inventory will be valued at the lower of its cost or net realizable value.Net realizable value (NRV) is equal to sale price less cost to sell. Net Realizable Value for each of the three products is calculated as follows:-

NRV of Y1 = Sale Price - Cost to sell (4% of Sale price)

= $3,500 - ($3,500*4%) = $3,360

NRV of Y2 = $10,800 - ($10,800*4%) = $10,368

NRV of Y3 = $1,400 - ($1,400*4%) = 1,344

Y1 will be valued at its NRV (because its NRV of $3,360 is less than the cost of $3,400). Y2 will be valued at its cost of $9,200 (as its cost of $9,200 is less than its NRV of $10,368). Y3 will also be valued at its NRV (because its NRV of $1,344 is less than the cost of $1,600).

Total value of Inventory = Product Y1+Product Y2+Product Y3

= $3,360+$9,200+$1,344 = $13,904

Hence the correct option is A2) $13,904.

2) Repaying a bank loan by issuing shares will decrease the liability of bank loan and increase the share capital (i.e. Equity) but it has no effect on total assets. Hence the correct option is A2) Have no effect on total assets.

3) Weighted Average cost of goods sold on May 2 = Total Cost of units available on May 2/Total units available

= [(25 units*$10)+(10 units*$12)]/(25+10)

= ($250+$120)/35 units = $10.57 per unit

Cost of goods sold on May 2 = 28 units*$10.57 = $296

Weighted Avg COGS on 18 Oct = (Balance of units cost on May 2+Purchase on 21 July)/Total units available

= [(7 units*$10.57)+(15 units*$14)]/(7+15)

= ($74+$210)/22 units = $12.91 per unit

Cost of goods sold on 18 Oct = 18 units*$12.91 per unit = $232.38

Total cost of goods sold = $296+$232.38 = $528.38

Hence the correct answer is A3) $525.34 (the difference is due to rounding off).