Year Question Analysis From January- 2022 to January-25

Part: C

1. Topic: Inventories

MCQ
1. Which inventory valuation method assumes that the most recently purchased
items are the first to be sold?

(a) FIFO (First-In, First-Out)

(b) LIFO (Last-In, First-Out)
(c) Weighted average
(d) Specific identification
(e) None of the above.
2. During September, Khan had sales of 1,48,000, which made a gross profit of
40,000. Purchases amounted to 100,000 and opening inventory was 34,000.
The value of closing inventory was?

(a) Tk. 24,000

(b) Tk. 26,000
(c) Tk. 42,000
(d) Tk. 54,000
(e) Tk. 66,000
3. ABC Inc. PLC changes its method of valuation of inventories from weighted-
average method to FIFO method. ABC Inc. PLC should account for this change
as

(a) A change in estimate and account for it prospectively

(b) A change in accounting policy and account for it prospectively
(c) A change in accounting policy and account for it retrospectively
(d) Account for it as a correction of an error and account for it retrospectively
(e) Earnings and total liabilities.
4. Prime Plc is a VAT registered retailer. All transactions attract VAT at the rate of 20%.
For the year to 30 June 20X7, Prime made purchases of Tk.69,600 including VAT
and made sales of Tk.89,400 excluding VAT. There was no change in the figures of

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 opening and closing inventory in the statement of financial position as at 30 June
20X6 and 20X7.

Required:

What was Prime plc’s gross profit for the year ended 30 June 20X7?

(a) Tk.19,800
(b) Tk.14,900
(c) Tk.31,400
(d) Tk.16,500
(e) Tk.15,500
5. On 1 September 20X8, Fareast had inventory of Tk.3,80,000. During the month,
sales totaled Tk.6,50,000. On 30 September 20X8 a fire destroyed some of the
inventory. The undamaged goods were valued at Tk.2,20,000. The business makes
all sales with a standard gross profit margin of 30%.

Based upon this information, what is the cost of the inventory destroyed in the
fire?

(a) Tk.1,85,000
(b) Tk.1,40,000
(c) Tk.4,05,000
(d) Tk.3,60,000
(e) Tk.380,000
6. If the LIFO inventory method was used last period, it should be used for the
current and following periods because of

(a) Consistency.
(b) Materiality.
(c) Timeliness.
(d) Verifiability.
(e) Faithful representation.
7. NIDO Company’s ending inventory is understated $4,000. The effects of this
error on the current year’s cost of goods sold and net income, respectively,
are:

(a) understated, overstated

(b) overstated, understated

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 (c) overstated, overstated
(d) understated, understated
(e) No effect.

8. Which of the following should not be included in the inventory of a company

using IFRS?

(a) Goods held on consignment from another company.

(b) Goods shipped on consignment to another company.
(c) Goods in transit from another company shipped FOB shipping point.
(d) All of the above
(e) None of the above.
9. Which of the following items cannot be included in the cost of inventories?

(a) Irrecoverable import duties payable on the acquisition of inventories

(b) Fixed production overheads
(c) The cost of abnormal wastage of materials and labor
(d) Variable production overheads
(e) None of these
10. Wythenshawe Ltd commenced business on 1 June 20X4 manufacturing a single
type of widget, which had a selling price throughout that year of CU45. During the
year the company made 10,000 widgets and incurred the following costs.
CU

Materials 150,000

Labour 75,000

Variable production overheads 50,000

Fixed production overheads 37,500

Administrative, selling and distribution costs 40,000

Towards the end of Wythenshawe Ltd’s first year of trading, market conditions
deteriorated and the company was left with 3,000 finished widgets in inventory
at its year end. These widgets can be sold for CU35 each but only after
incurring CU6 per unit selling [Link] accordance with BAS 2 Inventories,
what was Wythenshawe Ltd’s net profit for the year ended 30 June 20X5?

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 (a) CU59,500
(b) CU49,500
(c) CU56,250
(d) CU74,250
(e) CU67,500
11. compared to a normal production level of 12,000 widgets. 1,000 finished widgets
were held at the year end. Production costs incurred for the year were as follows.

CU

Raw materials 100,000

Direct labour 50,000

Variable overheads 40,000

Fixed overheads 120,000

In accordance with BAS 2 Inventories, what is the value of Kidderminster Ltd's

finished goods at 30September 20X6?

(a) CU19,000
(b) CU25,000
(c) CU29,000
(d) CU31,000
(e) CU15,000
12. Which of the following costs of conversion cannot be included in cost of
inventory?
(a) Cost of direct labor
(b) Factory rent and utilities.
(c) Salaries of sales staff (sales department shares the building with factory
supervisor)
(d) Factory overhead based on normal capacity
(e) None of the above

1. b 2. b 3. c 4. c 5. a

6. a 7. b 8. a 9. c 10. b

11. C 12. c

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 True/False

1. If an entity uses the periodic weighted average cost method to value closing
inventory, unit average cost is calculated once at the end of an accounting period.

Answer:

1. True

Math/Case

Question 01: (Sep 24)

Asian Hawthorne PLC. Identified the following inventory errors in 20X5:

1) Goods were in transit from a vendor on December 31, 20X5. The invoice cost was
Tk. 82,000 and the goods were shipped FOB shipping point on December 27, 20X5.
The goods will be sold in 20X6 for Tk. 135,000. The goods were not included in the
inventory count.
2) On January 6, 20X6, a freight bill for Tk. 6,000 was received. The bill relates to
merchandise purchased in December 20X5 and two-thirds of this merchandise was
still in inventory on December 31, 20X5. The freight charges were not included in
either the inventory account or accounts payable on December 31, 20X5.
3) Goods shipped to a customer FOB destination on December 29, 20X5, were in
transit on December 31, 20X5, and had a cost of Tk. 27,000. When notified that the
customer had received the goods on January 3, 20X6, Hawthorne’s bookkeeper
issued a sales invoice for Tk. 42,000. These goods were not included in the inventory
count.
4) Excluded from inventory was a box labeled “Return for Credit.” The cost of this
merchandise was Tk. 2,000 and the sale price to a customer had been Tk. 3,500. No
entry had been made to record this return and none of the returned merchandise
seemed damaged.
Required:
I. Determine the effect of each of the above errors on both the balance sheet accounts
at December 31, 20X5, and the reported net income for the year ended December
31, 20X5.
II. Assume the books are still open for 20X5. Provide any required adjusting journal
entries to correct the errors.
III. How would the adjustments change if the books are now closed for 20X5?

Question 02: (May 24)

The normal selling price of an item included in yearend inventories is Tk.21 per unit. The
item originally cost Tk.15 per unit, but could only be sold at the normal selling price after
modifications were made after the year end at a cost of Tk.5 per unit. The scrap value of the
item is Tk.11 per unit.

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Under IAS 2 Inventories at what amount should the item be included in the financial
statements?
Question 03: (Jan 24)
TZ Brown Ltd. was involved in one default and repossession case during the year given
bellow:
A Toy was sold to MS Moon for Tk.1,800 including a 35% markup on selling price. MS Moon
made a down payment of 20%, four of the remaining 16 equal payments and then defaulted
on further payment. The Toy was repossessed, at which time the fair value was determined
to be Tk. 800.
Required:
Give journal entries in the books of TZ Brown Ltd. to record the repossession.

Question 04: (Sep 23)

The following costs relate to a unit of inventory:

Cost of raw materials Tk.1.00

Direct labour Tk 0.50

During the year Tk 60,000 of production overheads were incurred.

8,000 units were produced during the year which is lower than the normal level of 10,000
units. This was as a result of a fault with some machinery which resulted in 2,000 units
having to be scrapped.

At the year-end, 700 units are in closing inventory.

Required: What is the cost of closing inventory?

Question 05: (Sep 23)

Simic Distributors has been using the weighted average (WA) costing method to report its
inventory and cost of sales amounts for several years. Early in 2021, management decided
that the FIFO costing method would provide more relevant information to the financial
statement readers. The following information regarding year-end inventory amounts has
been determined:

Date Inventory – WA Inventory – FIFO

31 December 2018 Tk. 500,000 Tk. 530,000

31 December 2019 Tk. 590,000 Tk. 650,000

31 December 2020 Tk. 660,000 Tk. 730,000

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Information for inventory amounts prior to the 2018 fiscal year cannot be obtained. The
company’s retained earnings balances prior to the change were Tk. 1,100,000 on December
31, 2019, and Tk. 1,375,000 on December 31, 2020. The company’s tax rate is 30%.

Required:

I. Prepare the journal entry required in 2021 to reflect the accounting policy change.
Assume the books have been closed for 2020 and for all previous years.
II. Prepare the comparative column of the retained earnings portion of the statement of
shareholders’ equity that will be presented in the 2021 financial statements. The net
income previously reported in 2020 was Tk. 275,000.

Question 06: (Jan 23)

Part: (A)
An entity shall recognize revenue when (or as) the entity satisfies a performance obligation
by transferring a promised good or service to a customer. An asset is transferred when (or
as) the customer obtains control of that asset.
Required: List the different indicators of transfer of control.
Part (B):
Pluto Limited (PL) sells industrial chemicals at following standalone prices:
Products Taka (per carton)
C-1 1,00,000
C-2 90,000
C-3 1,10,000
PL regularly sells a carton each of C-2 and C-3 together for Tk. 1,70,000.
Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell one
carton of each product for a total price of Tk. 260,000.

Question 07: (May 22)

Zehms Company began operations in 2019 and adopted weighted-average pricing for
inventory. In 2021, in accordance with other companies in its industry, Zehms changed its
inventory pricing to FIFO. The pretax income data is reported below.

Year Weighted-Average FIFO

2019 Tk. 370,000 Tk. 395,000
2020 390,000 420,000
2021 410,000 460,000

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Required:
I. What is Zehms’s net income in 2021? Assume a 35% tax rate in all years.
II. Compute the cumulative effect of the change in accounting principle from weighted-
average to FIFO inventory pricing.
III. Show comparative income statements for Zehms Company, beginning with income
before income tax, as presented on the 2021 income statement.

Question 08: (May 22)

The records of Sejuti’s Boutique report the following data for the month of April:

Sales Tk.95,000 Purchases (at cost) Tk. 55,000

Sales returns 2,000 Purchases (at sales price) 88,000
Markups 10,000 Purchase returns (at cost) 2,000
Markup cancellations 1,500 Purchase returns (at sales price) 3,000
Markdowns 9,300 Beginning inventory (at cost) 30,000
Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500
Freight on purchases 2,400

Required:
Compute the ending inventory by the conventional retail inventory method.

Question 09: (Jan 22)

Determine the ending inventory under the conventional retail method for the furniture
department of Mayron Department Stores from the following data (amounts in
thousands).(Round to nearest percent.)

Cost Retail
Inventory,Jan.1 Tk.149,000 Tk.283,500
Purchases 1,400,000 2,160,000
Freight-in 70,000
Markups,net 92,000
Markdowns,net 48,000
Sales 2,175,000

If the results of a physical inventory indicatedan inventory at retail of Tk. 295,000, what
inferences wouldyou draw?

Question 10: (Jan 22)

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A company owns inventories of 40,000 gallons of oil which cost £800,000 on 1 December
[Link] order to hedge the fluctuation in the market value of the oil, on 1 December 20X3
the company signs a futures contract to deliver 40,000 gallons of oil on 31 March 20X4 at
the futures price of £22 per gallon. The market price of oil on 31 December 20X3 is £22.25
per gallon and the futures price at that date for delivery on 31 March 20X4 is £24 per gallon.

Required:
Explain how these transactions should be accounted for at 31 December 20X3:
(i) Without hedge accounting
(ii) With hedge accounting.

Question 11: (Jan 25)

6.(b)
Sarah Limited, a client of your consulting firm, has approached you with the following
question regarding inventory:
(1) Fabric included in year- end inventory includes fabric being shipped from USA on
FOB terms (risks and rewards are therefore transferred on date of shipment from the
foreign harbour). Delivery costs associated with this special fabric are excessive
(Tk.50,000 more than normal delivery costs), but are required urgently for seamless
production. Can this Tk. 50,000 be included in the inventory value at year end?
(2) The company used a consultant to design new baggies (a completely new product
with which the company has no experience), at a total cost of Tk.30,000. This was a
once off order for a large surf store chain. The baggies were complete by year end at a
total production cost of Tk.5,00,000. Can the consultant’s fees be included in the
inventory valuation?
(3) Fabric X used in production of the T-Shirts, is valued at Tk.50 per metre, but can
only be sold at Tk.35 per metre. Finished T-Shirts are expected to sell for Tk.100 and
Tk.37 to produce. At what value should Fabric X be recognised in the financial
statements?
Required: Respond briefly to all the above queries of your client in accordance with
IAS 2.

Answer 01:

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NOTE: Positive amounts represent overstatements and negative amounts represent
understatements.
Item Inventory A/R A/P Net Income
A (82,000) -- -- (82,000)
B (4,000) -- (6,000) 2,000
C (27,000) -- -- (27,000)
D (2,000) 3,500 -- 1,500
Total (115,000) 3,500 (6,000) (105,500)
(ii)
General Journal
Date Account/Explanation PR Debit Credit
Inventory 82,000
Cost of goods sold 82,000

Date Account/Explanation PR Debit Credit

Inventory 4,000
Cost of goods sold 2,000
Accounts payable 6,000

Date Account/Explanation PR Debit Credit

Inventory 27,000
Cost of goods sold 27,000

Date Account/Explanation PR Debit Credit

Inventory 2,000
Cost of goods sold 2,000
Sales returns and allowances 3,500
Accounts receivable 3,500

(iii) The journal entries would be the same, except any income statement accounts (cost of
goods sold and sales returns) would be replaced with an adjustment to retained earnings.

Answer 02:
Inventories should be measured at the lower of cost and NRV.
Cost = TK.15
NRV = (21 – 5) = TK.16
The inventories should be carried at TK.15 per unit.

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Answer 03:
Calculation of Account Receivables

Installment sales Tk. 1,800

Down payment (20%) (360)
1,440
Installment paid (1,440×4)/16 (360)
Balance of Account Receivables 1,080

Deferred Gross Profit=1,080×35%=378

TZ Brown Ltd.
Journal entries

Tk. Tk.
Repossessed Merchandise-Toy 800
Deferred Gross Profit 378
Account Receivables 1,080
Gain on Repossession 98

Answer 04:
Production overheads = Tk. 60,000/10,000 units = Tk. 6.00 per unit.
Cost per unit:

Raw materials Tk. 1.00

Direct labour 0.50
Production overheads 6.00
Total cost per unit 7.50

Cost of 700 units in closing inventory = 700 x Tk 7.50 =Tk 5,250.

Answer 05:
1. This is an accounting policy change that should be applied retrospectively. The
following journal entry is required on January 1, 2021, to reflect the adjustment:

General Journal
Inventory (opening)*. . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000

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 * The account used here will depend on whether the company uses a perpetual or
periodic inventory system. With a periodic system, opening inventory is adjusted. With a
perpetual system, cost of sales would be adjusted.

Note: Only the effect in 2020 needs to be considered. Inventory adjustments are self-
correcting over a two-year period, so only the difference in the 2020 ending inventory
needs to be adjusted.

2. The comparative column (2020) of the retained earnings statement would look like this:
2020
(Restated)
Opening retained earnings as previously stated Tk. 1,100,000
Accounting policy change, net of tax of Tk. 18,000 42,000
Opening balance, restated 1,142,000
Net income (restated) 282,000
Closing retained earnings Tk. 1,424,000

The effect on opening retained earnings (i.e., January 1, 2020) reflects the inventory
difference on December 31, 2019 (650,000 − 590,000) less tax. The net income for 2020
is calculated as follows:
Income as previously reported Tk. 275,000
Reversal of 2019 difference, less tax (42,000)
2020 difference, less tax 49,000
Revised net income Tk. 282,000

Answer 06:
Part (a):
Indicators of the transfer of control, which include, but are not limited to, the
following:
I. The entity has a present right to payment for the asset.
II. The customer has legal title to the asset.
III. The entity has transferred physical possession of the asset (except bill and hold etc)
the customer has the significant risks and rewards of ownership of the asset.
IV. The customer has accepted the asset.

Part (b)

C1 C2 C3
Total
Stand-alone prices 90,000 110,000
Transaction price allocated [90:110] x170,000 76,500 93,500
Stand-alone prices (Revised) 100,000 76,500 93,500
Transaction price allocated [100:76.5:93.5] x 260,000 96,296 73,667 90,037

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Answer 07:

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Answer 08:

Answer 09:
Ending inventory:

Cost Retail

Beginning inventory. Tk.149,000 Tk. 283,500

Purchases. 1,400,000 2,160,000
Freight-in. 70,000
Totals. 1,619,000 2,443,500
Add net markups - 92,000

Tk.1,619,000 2,535,500
Deduct net markdowns. 48,000
2,487,500

Deduct sales. 2,175,000

Ending inventory, at retail. Tk.12,500

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 𝑇𝐾.1.619.000
Ratio of cost to selling price 𝑇𝐾.2,535.500
= 64%.

Ending inventory estimated at cost=64% X Tk. 312,500=Tk. 200,000.

The retail method, above, showed an ending inventory at retail of Tk. 312,500; therefore,
mer-chandise not accounted for amounts to Tk. 17,500 (Tk. 312,500 - Tk. 295,000) at retail
and Tk.11,200(Tk. 17,500 X.64) at cost.

Answer 10:

The futures contract was intended to protect the company from a fall in oil prices (which
would have reduced the profit when the oil was eventually sold). However, oil prices have
actually risen,so that the company has made a loss on the contract.

(i) Without hedge accounting

The futures contract is a derivative and therefore should be remeasured to fair value under
IAS [Link] loss on the futures contract should be recognized in profit or loss:

Dr Profit or loss (40,000*[£24 - £22]) £80,000

Cr Financial liability £80,000

(ii) With hedge accounting

The loss on the futures contract should be recognized in profit or loss, as before.

There is an increase in the fair value of the inventories:

Fair value at 31 December 20X3 (40,000*£22.25) £890,000

Fair value at 1 December 20X3 = cost (800,000)

Gain 90,000

The gain should also be recognized in profit or loss and adjusted against the carrying
amount of the inventories:

Dr Inventory £90,000

Cr Profit or loss £90,000

The net effect on profit or loss is a gain of £10, 000, compared with a loss of £80,000 without
hedging.

Note: The hedge is highly effective: 80,000/90,000=89% which is within the 80%-125% range.

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Answer 11:

(6-b)

1) In terms of IAS 2.18, any costs (regardless of the amount), that are directly
attributable in bringing the inventory to the location and in a condition to be used as
intended by management may be capitalised to the asset. Thus the Tk.50 000 can be
included in the cost of the fabric. Note however that additional consideration must
be given to calculating the net realizable value and ensuring that it is not less that
this new higher cost of the fabric (or else a write down would be required).

2) Yes, the consultant’s fees may be capitalized to the cost of the baggies inventory
under IAS 2.18: any costs (regardless of the amount), that are directly attributable in
bringing the inventory to the location and in a condition to be used as intended by
management may be capitalized to the asset.

3) Fabric X should be valued at cost because no write down below cost to NRV is
permitted if the finished goods in which the fabric is used (the T-shirts) are expected
to be sold at or above cost (IAS 2.32).

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