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.
You're reporting an error for "FR – L2 – Q47 – Provisions and Contingencies"
13 Marks
FR – L2 – Q46 – Events After the Reporting Period
Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.
Earley Enterprises is finalising its accounts for the year ended 31 December 20X3. The following events have arisen since the year end and the financial director has asked you to comment on the final accounts.
(a) At 31 December 20X3 trade receivables included a figure of GH¢250,000 in respect of NedenCorp. On 8 March 20X4, when the current debt was GH¢200,000, NedenCorp went into receivership. Recent correspondence with the receiver indicates that no dividend will be paid to unsecured creditors.
(b) On 15 March 20X4 Earley Enterprises sold its former head office building, Whiteley Grove, for GH¢2.7 million. At the year end the building was unoccupied and carried at a value of GH¢3.1 million.
(c) Inventories at the year-end included GH¢650,000 of a new electric tricycle the Oparis. In January 20X4 the European Union declared the tricycle to be unsafe and prohibited it from sale. An alternative market, in Bongaria, is being investigated, although the current price is expected to be cost less 30%.
(d) Stingray Ltd, a subsidiary in Outer Sarnia, was nationalised in February 20X4. The Outer Sarnia authorities have refused to pay any compensation. The net assets of Stingray Ltd have been valued at GH¢200,000 at the year end.
(e) Freak floods caused GH¢150,000 damage to the Southridge branch of Earley Enterprises in January 20X4. The branch was fully insured.
(f) On 1 April 20X4 Earley Enterprises announced a 1 for 1 rights issue aiming to raise GH¢15 million.
Required
Explain how you would respond to the matters listed above.
Ashanti-Co Group
The assistant financial controller of the Ashanti-Co Group, a public listed company, has identified the matters below which she believes may indicate an impairment to one or more assets:
(a) Ashanti-Co owns and operates an item of plant that cost GH¢640,000 and had accumulated depreciation of GH¢400,000 at 1 October 20X3. It is being depreciated at 12½% on cost. On 1 April 20X4 (exactly half way through the year) the plant was damaged when a factory vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced capacity. Also it is expected that as a result of the damage the remaining life of the plant from the date of the damage will be only two years. Based on its reduced capacity, the estimated present value of the plant in use is GH¢150,000. The plant has a current disposal value of GH¢20,000 (which will be nil in two years’ time), but Ashanti-Co has been offered a trade-in value of GH¢180,000 against a replacement machine which has a cost of GH¢1 million (there would be no disposal costs for the replaced plant). Ashanti-Co is reluctant to replace the plant as it is worried about the long-term demand for the product produced by the plant. The trade-in value is only available if the plant is replaced.
Required
(a). Prepare extracts from the statement of financial position and statement of profit or loss of Ashanti-Co in respect of the plant for the year ended 30 September 20X4. Your answer should explain how you arrived at your figures.
(b). On 1 April 20X3 Ashanti-Co acquired 100% of the share capital of Asamankese Limited, whose only activity is the extraction and sale of spa water.
Asamankese Limited had been profitable since its acquisition, but bad publicity resulting from several consumers becoming ill due to a contamination of the spa water supply in April 20X4 has led to unexpected losses in the last six months. The carrying amounts of Asamankese Limited’s assets at 30 September 20X4 are:
GH¢’000
Brand (Vita-Cola – see below)
7,000
Land containing spa
12,000
Purifying and bottling plant
8,000
Inventories
5,000
32,000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of ‘Vita-Cola’, but because of the contamination it has re-branded its bottled water as ‘PureSpring’. After a large advertising campaign, sales are now starting to recover and are approaching previous levels. The carrying amount of the brand in the statement of financial position is the depreciated amount of the original brand name of ‘Vita-Cola’.
The directors have acknowledged that GH¢1.5 million will have to be spent in the first three months of the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old ‘Vita-Cola’ bottled water at a cost of GH¢2 million; the remaining inventories are labelled with the new brand ‘PureSpring’. Samples of all the bottled water have been tested by the health authority and have been passed as fit to sell. The old bottled water will have to be relabelled at a cost of GH¢250,000, but is then expected to be sold at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use of Asamankese Limited at 30 September 20X4, calculated according to the guidance in IAS 36, is GH¢20 million. There is no reliable estimate of the fair value less costs to sell of Asamankese Limited.
Required
Calculate the amounts at which the assets of Asamankese Limited should appear in the consolidated statement of financial position of Ashanti-Co at 30 September 20X4. Your answer should explain how you arrived at your figures.
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
(b) State the main factors that IAS 8 requires management to consider in selecting and applying accounting policies in the absence of any IFRS Accounting Standard.
(c) Discuss, briefly, alternative accounting policies on the following items in financial statements:
