SPU

Financial Accounting 2A / Accounting 2A – 2024

Class practice question # 2 - Inventory

QUESTION 2

The following inventory transactions were entered into by Alfa Ltd for February 2017:

February

1 Opening inventory: 92 units - 60 units at R120 each

- 32 units at R128 each

6 Sold 64 units

8 Sold 20 units

15 Purchased 200 units at R132 each

20 Sold 140 units

28 Purchased 240 units at R124 each

All units are sold at a selling price of R220 per unit. Alfa Ltd uses the perpetual method of
keeping inventory. On 28 February 2017, it was determined that the normal selling price
of the units dropped to R144 per unit and that the normal selling expenses amounted to
R20 per unit.

REQUIRED:

a. Determine the cost of inventory expense and cost of inventory on hand on 28

February according to the FIFO method.
b. Disclose the above information in the income statement for the month of February
2017.
 MEMO – Class Practice Question - Inventory

Question 2:

F I F O METHOD

Date Purchases Sold (Units) Balance (Units)

(Units)
01/02/2017 60 units @ R120
32 units @ R128
06/02/2017 60 units @R120 0 units @ R120
4 units @R128 28 (32 – 4) units @R128
08/02/2017 20 units @R128 8 (28 – 20) units @R128
15/02/2017 200 units @R132 200 units @R132
20/02/2027 8 units @R128 0 units @R128
132 units @R132 68 (200 – 132) units @R132
28/02/2017 240 units @R124 240 units @R124

Closing inventory (inventory on hand on 28 Feb 2017): 308 units (68 units + 240 units)

Cost of inventory:
60 units @R120 7 200
4 units @R128 512
20 units @R128 2 560
8 units @R128 1 024
132 units @R132 17 424
28 720
Inventory written down to NRV (38736 – 38192) 544 ** (inventory written off)
29 264

Cost of inventory on hand 308 units: R38736 (68 units x R132 + 240 units x R124)

Net realizable value 308 units @ 124 (R144 selling price -R20 selling exp) = R38 192

The NRV is lower than the cost price; thus the inventory should be written down to NRV.

** Inventory is written down to NRV: Cost R38736 less NRV R38192 = R544 (it should be
expensed in the income statement).

[When the NRV is lower than the cost price, the difference between the cost price and
NRV should be expensed in the income statement. The write-downs to the NRV in the
income statement should be recognized as part of the cost of sales. The difference
between NRV and cost price (if the NRV is lower than the cost price) would require a
journal entry adjustment: Cost of sales Dr R544; Inventory Cr R544). If NRV is higher than
the cost price, then no journal entry is required.]
(B) Disclosure:

Income statement for the month ended 28 Feb 2017

Revenue R49 280

(Selling 60+4+20+8+132 = 224 units x normal selling price R220)

Less cost of inventory R29 264

GROSS PROFIT R20 016