On 31 December Year 5, an associate, Anita Healthcare Ltd, holds inventory which is valued at GH¢32,000 purchased during the year from its investor Pamela Wellness Ltd. At the same date, Pamela Wellness Ltd holds inventory purchased from a subsidiary, Sophie Pharmaceuticals Ltd, which is valued at GH¢80,000.
Sales from Pamela Wellness Ltd to Anita Healthcare Ltd and from Sophie Pharmaceuticals Ltd to Pamela Wellness Ltd are priced at a mark-up of one-quarter on cost.
Pamela Wellness Ltd owns 30% of Anita Healthcare Ltd and 60% of Sophie Pharmaceuticals Ltd.
Required
Set out the adjustments necessary to reflect any unrealised profit in the above in the consolidated statement of financial position.
ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the following situations arising in the books of various companies. The year end in each case can be taken as 31 December 20X4 and you should assume that the amounts involved are material in each case.
(a) At the year-end there was a debit balance in the books of a company for GH¢15,000, representing an estimate of the amount receivable from an insurance company for an accident claim. In February 20X5, before the directors had agreed the final draft of the published accounts, correspondence with lawyers indicated that GH¢18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost GH¢400,000 in 20W8 and was expected to last for ten years. At the beginning of the 20X4 financial year the book value was GH¢280,000. It is now thought that the company will soon cease to make the product for which the equipment was specifically purchased. Its recoverable amount is only GH¢80,000 at 31 December 20X4.
(c) On 30 November, a company entered into a legal action defending a claim for supplying faulty machinery. The company’s solicitors advise that there is a 20% probability that the claim will succeed. The amount of the claim is GH¢500,000.
(d) An item has been produced at a manufacturing cost of GH¢1,800 against a customer’s order at an agreed price of GH¢2,300. The item was in inventory at the year-end awaiting delivery instructions. In January 20X5 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately GH¢300, which is expected to make it marketable with other customers at a price of about GH¢1,900.
(e) At 31 December, a company has a total potential liability of GH¢1,000,400 for warranty work on contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30% may be incurred but that the remaining 60% is highly unlikely to be incurred.
Required
For each of the above situations outline the accounting treatment you would recommend and give the reasoning of principles involved. The accounting treatment should refer to entries in the books and/or the year-end financial statements as appropriate.
To comply with copyright requirements while preserving the educational value of the questions and answers, the following subtle changes were made to names of individuals, companies, and locations in Question 20:
Company Name Changes:
“Teshie Trading Corporation” was changed to “Teshi Trading Limited”.
“TTC” (abbreviation for Teshie Trading Corporation) was changed to “TTL” (abbreviation for Teshi Trading Limited).
Location Changes:
No specific location names were altered in Question 20, as the original question did not reference specific geographic locations beyond the context of Ghana, which was retained as it aligns with the Institute of Chartered Accountants, Ghana.
Individual Name Changes:
No individual names were present in Question 20, so no changes were made in this regard.
Currency and Context:
The currency “GH₵” and all numerical values were retained exactly as in the original to maintain the integrity of the financial calculations.
The context, structure, and intent of the question and answer were preserved, with only the company name altered to avoid direct replication.
These changes ensure the question and answer remain educationally equivalent while addressing copyright concerns. The tables, financial data, and all other content were reproduced exactly as in the original attachment, except for the noted name changes.
Question Structure
====================================================================== Question Title: FR – L2 – Q20a – Inventories Level: Level 2 Professional Bodies: Institute of Chartered Accountants, Ghana (ICAG) Programs: Professional Program Subjects: Financial Reporting Topics: Financial Reporting Standards and Their Applications Total Marks: 9 Question Tags: Inventories, FIFO, Weighted Average Cost, Cost of Sales, Inventory Valuation, IAS 2 Question Short Summary: Compute cost of sales and inventory for Teshi Trading Limited using FIFO and weighted average cost methods for January 20X6.
Question:
(a) On 1 January 20X6, Teshi Trading Limited held 300 units of an item of finished goods inventory. These were valued at GH₵22 each. During January 20X6, the batches of finished goods were received into store from the production department, as follows:
Date
Units Received
Production cost per unit
10-Jan
400
GH₵23
20-Jan
400
GH₵25
25-Jan
400
GH₵26
Goods sold out of the inventory during January 20X6 were as follows:
Date
Units sold
Sale price per unit
14-Jan
500
GH₵31
21-Jan
500
GH₵33
28-Jan
100
GH₵32
Required
Compute the cost of sales and inventory at 31 January 20X6, applying the following basis of inventory valuation:
(i) FIFO
(ii) Weighted Average Cost (Average is updated after every transaction).
(b) The cost of inventory of Teshi Trading Limited (TTL) based on inventory count conducted on 17 January 20X6 was GH₵675,000. These included goods costing GH₵15,000 which were purchased in December 20X5 and have a net realisable value of GH₵12,000.
During the period between 31 December 20X5 and 17 January 20X6, the following transactions took place:
(i) Value of goods purchased amounted to GH₵155,710.
(ii) Sale of goods amounted to GH₵250,000. TTL normally sells goods at a mark-up of 25% of cost. However, 20% of the sales were made at a discount of 8% of the normal selling price.
(iii) Goods costing GH₵1,990 were returned to a supplier.
(iv) Goods sold to a customer on 4 January 20X6 were returned on 15 January 20X6.
Required
Calculate the value of inventories that should be reported in the financial statements of TTL as at 31 December 20X5.
(c) Which of the following items may be included in computing the value of inventory of finished goods manufactured by a business:
(i) raw materials
(ii) foremen’s salaries
(iii) carriage inwards
(iv) carriage outwards
(v) plant depreciation
(vi) cost of storage of finished goods
(vii) abnormal waste of materials
(viii) salesmen’s commission
(d) What will be the effect of the following on cost of sales, profit, and inventory:
(i) if in times of rising prices, the valuation of inventory is done on the basis of FIFO as opposed to weighted average cost method?
(ii) if an item of inventory having cost of GH₵69,300 and net realisable value of GH₵65,000 is omitted from original inventory count?
Kintampo Limited produces a single product. On July 31, 20X5, the finished goods inventory consisted of 4,000 units valued at GH₵220 per unit and the inventory of raw materials was worth GH₵540,000. For the month of August 20X5, the books of account show the following:
Raw material purchases
GH₵1,250,000
Direct labour
GH₵350,000
Selling costs
GH₵150,000
Depreciation on plant and machinery
GH₵100,000
Distribution costs
GH₵120,000
Factory manager’s salary
GH₵80,000
Indirect labour
GH₵60,000
Indirect material consumed
GH₵40,000
Other production overheads
GH₵90,000
Other accounting costs
GH₵200,000
Other administration overheads
GH₵180,000
Other information:
(i) 8,000 units of finished goods were produced during August 20X5.
(ii) The value of raw materials on August 31, 20X5 amounted to GH₵600,000.
(iii) There was no work-in-progress at the start of the month. However, on August 31, the value of work-in-progress is approximately GH₵250,000.
(iv) 5,000 units of finished goods were available in inventory as on August 31, 20X5.
Required:
Compute the value of closing inventory of finished goods as on August 31, 20X5 based on weighted average cost method.
Tamasi Manufacturing was formed on 1 January 20X5. The entity manufactures and sells a single product and values it on a first-in, first-out basis.
One tonne of raw material is processed into one tonne of finished goods.
The following details relate to 20X5.
Purchases of raw materials
Purchases:
Price: GH¢100,000 per tonne on 1 January, increasing to GH¢150,000 per tonne on 1 July
Import duties: GH¢10,000 per tonne
Transport from docks to factory: GH¢20,000 per tonne
Production costs
Production capacity: 1,000 tonnes of raw materials per week
Variable costs: GH¢25,000 per tonne
Fixed costs: GH¢30,000,000 per week
Sales details
Selling price: GH¢240,000 per tonne
Delivery costs to customers: GH¢8,000 per tonne
Selling costs: GH¢4,000 per tonne
Inventories at 31 December 20X5
Raw materials: 2,000 tonnes
Finished goods: 2,000 tonnes
There is a ready market for raw materials and the NRV of the raw materials is higher than its cost.
Required
Calculate and disclose the value of inventories at 31 December 20X5 in accordance with IAS 2.
Bolga Limited has the following purchases and sales of a particular product line.
Units purchased
Purchase price per unit
Units sold
Selling price per unit
GH₵’000
GH₵’000
2 December
100
500
60
530
16 December
60
503
80
528
30 December
70
506
50
524
14 January
50
509
70
524
28 January
80
512
50
520
11 February
40
515
40
520
At 31 December the physical inventory was 150 units. The cost of inventories is determined on a FIFO basis. Selling and distribution costs amount to 5% of selling price and general administration expenses amount to 7% of selling price.
Required
(a) State any three reasons why the net realisable value of inventory may be less than cost.
(b) Calculate to the nearest GH₵’000 the value of inventory at 31 December
(i) at cost
(ii) at net realisable value
(iii) at the amount to be included in the financial statements in accordance with IAS 2
Mega Construct is a listed construction company with an annual revenue of GH₵350m. Mega Construct’s draft statement of profit or loss shows a profit before tax for the year ended December 31, 2008 of GH₵40m.
Mega Construct’s audit firm is conducting an audit. This is the first audit of Mega Construct that this audit firm has conducted. An enquiry to the previous audit firm revealed no reasons for concern. On completing audit work at the company’s premises, the audit senior drafts a memo, extracts from which are reproduced below:
(a) Inventory valuation
Inventories include GH₵7m, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country’s National Road Authority, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review and on being offered a special purchase of this material, Mega Construct speculated on a favourable outcome of this review and purchased the material. In February 2009, shortly before the financial statements were approved by the directors, the National Road Authority reported that it would not, currently, accept the use of this material. If used on non-National Road Authority contracts the material’s net realisable value would not exceed GH₵2m.
The finance director maintains that the issue of the National Road Authority report was a non-adjusting event after the reporting period. The write down of the inventory should, therefore, be reflected in the next period’s financial statements.
Required:
Discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
(b) Depreciation
During the year ended December 31, 2005 the company purchased two computer controlled earth movers at a cost of GH₵2,500,000 each and a further two at the same price during the year ended December 31, 2006. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 2008, the company has decided that improvements in technology made it worthwhile scrapping their first two computer controlled earth movers and replacing them with the latest model at a cost of GH₵6,000,000 each. The company provides a full year’s depreciation charge in the year of acquisition and none in the year of disposal.
The company’s chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He urges that continued improvements in technology cannot be foreseen and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence.
Required:
Discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
(c) Contingent liability
The company is being sued for GH₵50m by the National Road Authority for defective work on a recently completed road. The company maintains that it met the National Road Authority’s specification and it is the Authority’s engineers who are at fault in drawing up the specification. Mega Construct maintains that it has no case to answer, that the possibility of loss is remote and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company’s road building techniques are under investigation by the National Road Authority. If the company were to lose the case its future going concern would be threatened. No disclosure has been made in the financial statements.
Required:
For the following issue, discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
