Accounting 100 Question Bank Chapter 13 (2017 AO 4) Question 8

QUESTION 8 (35 MARKS)

Perfect Pixie Entity is a pet fashion and accessories brand selling high end products to
wholesalers and to retail customers. Perfect Pixie Entity’s reporting period ends on 30 June
and they make use of the periodic inventory system. Perfect Pixie Entity and all their
suppliers are VAT vendors according to the VAT Act and VAT is calculated at 14%.

Perfect Pixie Entity applies a gross profit percentage of 30% on cost price. However for the
month of June 2017 Perfect Pixie Entity sold their goods at a 10% discount on sales price.

The following is an extract out of the trial balance for 1 July 2016 to 31 May 2017 and relates
to trade inventory of Perfect Pixie Entity:

R R
Date of balance
Dr Cr
Trade inventory 31 June 2016 750 000
Sales 30 May 2017 16 653 000
Purchases 30 May 2017 14 500 000
Returns (out) 30 May 2017 850 000
Freight (in) 30 May 2017 51 000
Freight (out) 30 May 2017 47 000

The following transactions took place during the month of June 2017 and have not yet been
recognised in the accounting records of Perfect Pixie Entity:

1. Perfect Pixie Entity sold inventory on credit to Dogbox on 15 June 2017 and issued sales
invoice Nr 10045A for R2 400 840.

2. On 18 June 2017 Perfect Pixie Entity bought inventory from Stylish Woof for an invoice
price of R684 000. The goods were delivered to the premises of Perfect Pixie Entity on
20 June 2017.

3. Upon inspection of the goods bought, it was determined that some of the items were not
according to specification and goods with an invoice price of R342 000 were returned on
22 June 2017, before payment was made. Stylish Woof issued a credit note on the
same day.

4. On the evening of 30 June 2017 there was a break-in at the store. On the morning of 1
July 2017 after a detailed inspection of the inventory, the following was noted:

a. Inventory with a cost of R36 000 was still on hand after the theft

b. Perfect Pixie Entity’s trade inventory is insured for R100 000. The insurer has not
yet confirmed if they will be paying an insurance compensation.

5. It was reliably estimated that the inventory on hand can only be sold for an expected
value of R24 000.

6.
Accounting 100 Question Bank Chapter 13 (2017 AO 4) Question 8

Required:

a) Calculate the insurance compensation that Perfect Pixie Entity can expect to receive
from their insurer for the theft of their inventories in the event that the insurer agrees to
the claim.

b) Prepare the journal entries to recognise the above transactions as well as the closing off
journal entries using the periodic inventory system for the year ended 30 June 2017.
(Closing off to the Profit or Loss and Retained Earnings accounts is not required).

Note:

Round calculated amounts to the nearest Rand where applicable.

Round percentages to the nearest percent (%) where applicable.

Accounting 100 Question Bank Chapter 13 (2017 AO 4) Question 8

QUESTION 8 (SOLUTION – 35 MARKS)

a) Value of insurance claim (10 MARKS)
i. Value of inventory before theft

Opening stock R750 000 

Add: Purchases R14 001 000
Purchases R14 500 000 
Purchases (R684 000 x 100 / 114) R600 000 
Min: Returns (out) (R850 000) 
Min: Returns (out) (R342 000 x (R300 000) 
100 / 114)
Plus: Freight (in) R51 000 
Total purchases R14 001 000
Less: Closing stock (balancing figure) (R141 000) 
Cost of sales R14 610 000
Sales: 1 July 2016 – 31 May 2017 R12 810 000 
R16 653 000 x 100 / 130
Sales: June 2017: R2 400 840 x R1 800 000 
100 / 114 x 100 / 90 x 100 / 130
R14 610 000

ii. Value of insurance claim

Closing trade inventories at the time of the event (R141 000) > insured amount
(R100 000) – therefore average clause does apply 
Insured amount Cost of inventories stolen
X
Cost of inventories at the time of theft 1

R100 000  R141 000 – R36 000 

X
R141 000  1

= R74 468(3c) x 1.14 

= R84 893 (4c)
Accounting 100 Question Bank Chapter 13 (2017 AO 4) Question 8

b) Journals on the periodic inventory system (25 marks)

Note: To earn a mark in the journal, both the accounts and the amount have to be
correct. if there is no journal narration -1 mark, if the classification is not provided or is
incorrect -1 mark, and if no indication of the account -1 mark..

2017 Dr Cr
15 Jun Receivable: Dogbox (SFP) 2 400 840 
Sales (P/L) 2 106 000 
VAT output (SFP) 294 800 
Recognise credit sales of inventories during June
2017

2017 Dr Cr
20 Jun Purchases (P/L) 600 000 
VAT input (SFP) 84 000 
Payable: Stylish Woof (SFP) 684 000 
Recognise purchase of inventories during June 2017

2017 Dr Cr
22 Jun Payable: Stylish Woof (SFP) 342 000 
Returns (out) (SFP) 300 000 
VAT input (SFP) 42 000 
Recognise returns (out) of inventories during June
2017

2017 Dr Cr
30 Jun Loss due to inventory theft (P/L) 105 000 
Purchases (P/L) 105 000 
Recognize the loss of inventories due to theft
R141 000 (p)– R36 000 

2017 Dr Cr
30 Jun Cost of sales (P/L) 750 000 
Trade Inventories (SFP) 750 000 
Close off the opening inventories by transferring the
asset inventories opening balance to cost of sales
expense

2017 Dr Cr
30 Jun Cost of sales (P/L) 105 000 p
Loss due to inventory theft (P/L) 105 000 p
Close off the loss against cost of sales
Accounting 100 Question Bank Chapter 13 (2017 AO 4) Question 8

2017 Dr Cr
30 Jun Returns (out) (P/L) 1 150 000 
Purchases (P/L) 1 150 000 
Close off returns (out) against purchases
850 000 + 300 000

2017 Dr Cr
30 Jun Purchases (P/L) 51 000 
Freight (in) (P/L) 51 000 
Close off freight (in) against purchases

2017 Dr Cr
30 Jun Cost of sales (P/L) 13 896 000 
Purchases (P/L) 13 896 000 
Close off purchases against cost of sales
14 500 000 + 600 000 – 105 000 – 1 150 000 +
51 000

2017 Dr Cr
30 Jun Trade inventories (SFP) 36 000 
Cost of sales (P/L) 36 000 
Recognise closing inventories by transferring a
portion of the expense cost of sales to the asset
inventories

2017 Dr Cr
30 Jun Loss due to write down of inventories to NRV (P/L) 12 000 
Trade inventories (SFP) 12 000 
Recognise the write-down of the cost of certain
inventory items to the net realisable value thereof

2017 Dr Cr
30 Jun Cost of sales (P/L) 12 000 
Loss due to write down of inventories to NRV
12 000 
(P/L)
Close off loss due to write down of inventories to
NRV to cost of sales