1) Merchandising Inventory

Merchandise inventory is the value of goods a company plans to sell for profit.
 Goods that are purchased primarily in finished form from wholesalers and retailers.
 Cost of merchandise inventory includes purchase price plus any other costs necessary to
get the goods in condition and location for sale.
Merchandise inventory includes all goods that have been purchased but not yet sold. This
unsold inventory is categorized as a current asset on a company’s balance sheet.
REI, Wal-Mart, and Amazon.com are called merchandising companies because they buy and sell
merchandise rather than perform services as their primary source of revenue.

Merchandising companies that purchase and sell directly to consumers are called retailers.
Merchandising companies that sell to retailers are known as wholesalers.

Manufacturing Inventory
Goods that are produced by a manufacturing company to be sold to wholesalers, retailers, or
other manufacturers.
Consists of:
 Raw materials
 Work in process
 Finished goods
Manufacturing inventory or Production inventory is one of the many types of inventory. It
includes stock of all parts and materials that is available with a manufacturing firm for use.
For a manufacturing company, this is an essential type of inventory.
2. Discuss the following terms about inventories

 Goods in transit:- are the products or materials which already leaves the seller’s
warehouse but not yet received by the buyer.
 Goods on consignment:- is a type of selling arrangement in which the seller
agrees to forward the goods to a buyer, with the understanding that payment for
those goods will be received when the buyer is able to sell them to his or her
customers.
 Sales return and allowances refer to the sales adjustment as a result of the return
of goods or merchandise inventory or a reduction from the original selling price due
to damages or defective goods or products. Sales return and allowances are the
contra account of the sales revenue account. It represents the adjustment to arrive
at the net sales.
 (PP&E) is a non-current, tangible capital asset shown on the balance sheet of a
business and is used to generate revenues and profits. PP&E plays a key part in
the financial planning and analysis of a company’s operations and future
expenditures, especially with regards to capital expenditures.
3. Discuss the accounting treatments for property, plant and equipment.

 Acquisition of PP&E
Acquisition is the process through which one entity gains possession or takes over the
ownership of a particular PPE. The different modes of acquiring PPE includes purchase,
construction, exchange transaction, non-exchange transaction, transfer and finance
lease.
 Depreciation of PP&E
The other major component of the PP&E formula is depreciation. Depreciation reduces the
value of property, plant, and equipment on the balance sheet as the value of assets is lowered
over time due to wear and tear and the reduction of their useful life. The depreciation expense
is used to reduce the value of the net balance and it flows to the income statement as an
expense.
PP&E Formula
Net PP&E = Gross PP&E + Capital Expenditures – Accumulated Depreciation
To illustrate:
In May 2017, Factory Corp. owned PP&E machinery with a gross value of $5,000,000.
Accumulated depreciation for the same machinery was $2,100,000. Due to the wear and tear of
the machinery, the company decided to purchase another $1,000,000 in new equipment.
For this period, the depreciation expense for all old and new equipment is $150,000.
Thus, the ending balance is $3,750,000. This is found by taking $5,000,000 + $1,000,000 –
$2,100,000 – $150,000.
 Capital Expenditures
As the above formula shows, Capital Expenditures (often referred to as Capital Expenditure for
short) are what is added to the net property, plant, and equipment balance on the balance
sheet. When the company spends money investing in either
(1) updating existing equipment, or
(2) purchasing new additional equipment, this adds to the total PP&E balance on the balance
sheet.
 Disposal of PP&E.
The financial accounting term disposition of property, plant, and equipment refers to the
disposal of the company's assets. This can include the sale, exchange, abandonment, and
involuntary termination of the asset's service. Disposition of plant typically results in a gain or
loss appearing on the company's income statement.

Companies can dispose of assets voluntarily through their sale or exchange. Involuntary
conversions can also occur, which is the termination of the asset's serviceable life due to an
unwanted event such as a fire, flood, or even theft. Regardless of the disposal process,
depreciation continues up to the point in time this occurs, and the accounts associated with the
asset must be removed from the company's books.

Since depreciation is a function of serviceable life, and not the asset's market value, it would be
rare for the book value of the asset to be equal to its disposal value. Typically, companies realize
a gain or loss on the disposition of plant and equipment. In theory, that loss or gain should have
been reflected on the income statement during the asset's serviceable life. In practice, the gain or
loss appears in the current accounting period.

If the disposition involves a business segment, the gain or loss should be reported along with
other gains or losses associated with discontinued operations. All other transactions would be
categorized as continuing operations.

Example : Company A entered into an agreement to sell Company XYZ its two year old widget
maker for $80,000. The original cost of the widget maker was $120,000, and the asset was being
depreciated over four years. Accumulated depreciation was $60,000 on this equipment. The gain
or loss on the sale would be calculated as:

Cost of Widget Maker $120,000

Less: Accumulated Depreciation $60,000
 Net Book Value $60,000

Proceeds from Sale $80,000

Gain from Sale of Widget Maker $20,000

The following journal entries are needed to remove the asset from the company's books:

Debit Credit
Cash $80,000
Accumulated Depreciation $60,000
Gain on Disposal $20,000

Perpetual Periodic System

System

Inventory ………620,000 Purchase ……………620,000

Accountable……..620,000 A/payable…………….620,000

Inventory ………16,000 Purchase …………….16,000

A/payable………….16,000 A/payable……………..16,000

A/payable ……….20,000 A/payable ……………..20,000

Inventory……………20,000 Purchase return&

Allow……………………20,000

A/payble ………..620,000 A/payble ………………620,000

Cash…………………607,600 Purchase discount………12,400

Inventory…………….12,400 Cash…………………….607,600

A/Receiv ………..830,000 A/Receiv ……………...830,000

Sales Rev…………….830,000 Sales……………………..830,000

CGS ……….550,000 No entry for CGS

Inventory…………….550,000 inventory ……………..174,000

Income Summery………174,000

Average Cost Periodic Inventory System

Beginning inventory (4,000 units @ $5.50) 22,000

Plus: Purchases (7,000 units @ various prices) 49,500
Cost of goods available for sale (11,000 units) 71,500
 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑨𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒔𝒂𝒍𝒆
Weighted average unit cost =
𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒔𝒂𝒍𝒆
71500
Weighted average unit cost = = 6.50
11000
Cost of goods sold (6,500 units @ $6.50) = 42,250
Ending inventory (4,500 units @ $6.50) = 29,250
FIFO Periodic Inventory System
Beginning inventory (4,000 units @ $5.50) 22,000
Plus: Purchases (7,000 units @ various prices) 49,500
Cost of goods available for sale (11,000units) 71,500
Ending inventory determined below (33000)
Cost of goods sold (6,500 units) 38,500
Cost of Ending Inventory:
Date of Purchase Units Unit Cost Total Cost
Mar. 22 1500 7.00 10500
Oct. 15 3000 7.50 22500
Total 4500 33000

FIFO Periodic Inventory System

Cost of Goods Sold:
Date of Purchase Units Unit cost Total cost
Beg. invent. 4000 5.50 22000
Jan. 17 1000 6.00 6000
Mar. 22 1500 7.00 10500
Total 6500 38500

LIFO Periodic Inventory System

Beginning inventory (4,000 units @ $5.50) 22,000
Plus: Purchases (7,000 units @ various prices) 49,500
Cost of goods available for sale (11,000units) 71,500
Ending inventory determined below (25000)
Cost of goods sold (6,500 units) 46,500
Cost of Ending Inventory:
Date of Purchase Units Unit Cost Total Cost
Beg. Inventory 4000 5.50 22000
Jan. 17 500 6.0 3000
Total 4500 25,000

LIFO Periodic Inventory System

Cost of Goods Sold:
Date of Purchase Units Unit cost Total cost
Jan. 17 500 6.0 3000
Mar. 22 3000 7.00 21,000
Oct. 15 3000 7.50 22,500
Total 6500 46,500

FIFO Perpetual Inventory System

Date Purchased Sold Balance
Beginning [email protected] [email protected]= 22000
inventory = 22000
Jan. 10 [email protected]= 11000 [email protected]= 11000
Mar. 17 [email protected] [email protected]
= 6000 [email protected] 17000

Mar. 22 [email protected] [email protected]

= 21000 [email protected] 38000
[email protected]

Apr. 15 [email protected] = 8250 [email protected]

[email protected] 29750
[email protected]

Oct. 15 [email protected] [email protected]

= 22500 [email protected] 52250
[email protected]
[email protected]
Nov.20 [email protected] [email protected]
[email protected] 19250 [email protected] 33000
[email protected]
CGS = 38500

LIFO Perpetual Inventory System

Date Purchased Sold Balance
Beginning [email protected] [email protected]= 22,000
inventory = 22,000
Jan. 10 [email protected]= 11,000 2,[email protected]= 11,000
Mar. 17 [email protected] [email protected]
= 6,000 [email protected] 17,000

Mar. 22 [email protected] [email protected]

= 21,000 [email protected] 38,000
[email protected]

Apr. 15 [email protected] = 10,500 2,[email protected]

[email protected] 27,500
1,[email protected]

Oct. 15 [email protected] 2,[email protected]

= 22,500 [email protected] 50,000
1,[email protected]
[email protected]

Nov.20 3,[email protected] 2,[email protected]

[email protected] 22,500 [email protected] 27,500
[email protected] 1,[email protected]
Tot CGS = 44,000
 Average Cost Perpetual Inventory System
Date Purchased Sold Balance
Beginning [email protected] [email protected]= 22,000
inventory = 22,000
Jan. 10 2,[email protected]= 11,000 2,[email protected]= 11,000
Mar. 17 [email protected] 11,000+6,000=17000
= 6000 2000+1000=3,000unit

Average cost 17,000÷3,000units = 5.667/units

per Unit:
Mar. 22 [email protected] 17000+21000=38000
= 21,000 3000+3000=6000 unit
Average cost 38000÷6000units = 6.333/unit
Per Units:
Apr. 15 [email protected] =9,500 4,[email protected]=28,500

Oct. 15 [email protected] 28500+22500=51,000

= 22,500 4500+3000=7500unit

Average 51,000÷7,500 =6.80/unit

Cost per
Unit:
Nov.20 [email protected]=20400 [email protected]= 30,600

Tot CGS = 40,900

6)
𝑪𝒐𝒔𝒕−𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆 𝟑𝟔𝟎,𝟓𝟎𝟎−𝟑𝟓𝟎𝟎𝟎
Annual depreciation = 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅
= 𝟓
= 65,100

Depreciation Method- Straight-Line Method

Year Cost Yearly Accumulated Carrying value

Depreciation Depreciation (Book Value)

Beginning of first year Br. 360,500 - - Br. 360,500.00

End of first year 360,500 Br. 65,100 Br. 65,100 360,400

End of second year 360,500 65,100 130,200 230,300

End of third year 360,500 65,100 195,300 165,200

End of fourth year 360,500 65,100 260,400 100,100

End of fifth year 360,500 65,100 325,500 35,000

 𝑪𝒐𝒔𝒕−𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆 𝟑𝟔𝟎,𝟓𝟎𝟎−𝟑𝟓,𝟎𝟎𝟎
Hourly depreciation Rate = = = 32.55
𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔 𝒐𝒇 𝒖𝒔𝒆𝒍 𝒍𝒊𝒇𝒆 𝟏𝟎,𝟎𝟎𝟎

Depreciation Schedule – Production Method

Year Cost Hours Depreciation Yearly Depr. Accum. Carrying value
Per Hour (Book value)
Depr.

Beginning of the Br.360,500 - Br. 32.55 - - Br. 360,500

First year

End of first year 360,500 1,800 32.55 Br. 58,590 Br. 58,590 301,910

End of second year 360,500 2,000 32.55 65,100 123,690 236,810

End of third year 360,500 2,500 32.55 81,375 205,065 155,435

Depreciation Schedule, Double-Declining Balance Method

Book Value at the Beginning of year * Declining balance rate = Yearly Depreciation

360,500 * 40% = 144,200

Year Cost Fixed Depr. Yearly Accumulated Carrying Value

Rate Depreciation Depreciation (BV)

End of first year 360,500 40% Br. 144,200 Br. 144,200 216,300

End of Second year 216,300 40% 86,520 230,720 129,780

End of third year 129,780 40% 51,912 282,632 77,868

End of fourth year 77,868 40% 42,868 325,500 35,000

DEPRECIATION SCHEDULE- SUM - OF - THE - YEARS - DIGITS METHOD

with an estimated life of 5 years, the denominator of the fraction is

5+4+3+2+1 = 15. Yearly depreciation = [depreciable cost – estimated residual value] * Rate.

Depreciable Cost = Cost – Salvage Value

325,500 = 360,500- 35,000

 Year Depreciable Cost Rate Yearly Accumulated Book Value
Depreciation Depreciation

1 325,500 5/15 Br.108,500 Br. 108,500 252,000

2 325,500 4/15 86,800 195,300 165,200

3 325,500 3/15 65,100 260,400 100,100

4 325,500 2/15 43,400 303,800 56,700

5 325,500 1/15 21,700 325,500 35,000

Journal Entry for Depreciation

The journal entry to record this expense is straightforward. We simply record the depreciation on
debit and accumulated depreciation on credit.

Journal Entry for year 1

In year 1, the journal entry is as follow:

Account Name Debit Credit

Depreciation (Income Statement) 65,100
Accumulated Depreciation (Balance Sheet) 65,100
(To record depreciation for year 1)

Journal Entry for year 2

In year 2, the depreciation is the same as in year 1. The journal entry for year 2 is as follow:

Account Name Debit Credit

Depreciation (Income Statement) 65,100
Accumulated Depreciation (Balance Sheet) 65,100
(To record depreciation for year 2)

Journal Entry for year 3

Account Name Debit Credit

Depreciation (Income Statement) 65,100
Accumulated Depreciation (Balance Sheet) 65,100
(To record depreciation for year 3)
Journal Entry for year 4

Account Name Debit Credit

Depreciation (Income Statement) 65,100
Accumulated Depreciation (Balance Sheet) 65,100
(To record depreciation for year 4)

Journal Entry for year 5

Account Name Debit Credit

Depreciation (Income Statement) 65,100
Accumulated Depreciation (Balance Sheet) 65,100
(To record depreciation for year 5)