Accounting Fundamentals: Inventory Cost, Depreciation Schedule, Profit Calculation

This document covers topics like inventory cost, depreciation schedule, and profit calculation under different methods. It includes solved examples and journal entries for missing inventory.

Running head: ACCOUNTING FUNDAMENTALS
Accounting fundamentals
Name of the student
Name of the university
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Author note

1ACCOUNTING FUNDAMENTALS
Table of Contents
Question 1..................................................................................................................................2
A. Cost of inventory.............................................................................................................2
B. Recording missing inventory..........................................................................................3
C. Ledger account in T form................................................................................................3
Question 2..................................................................................................................................4
A. Depreciation schedule.....................................................................................................4
B. Report to management....................................................................................................5
Question 3..................................................................................................................................9
A. Relevant ledger account..................................................................................................9
B. Asset account in the financial statement.........................................................................9
C. Revaluation loss............................................................................................................10
Reference..................................................................................................................................11

2ACCOUNTING FUNDAMENTALS
Question 1
A. Cost of inventory
Data
Purchase Sales
Balance (units –
sales)
Dates Units Rates per unit
July 01 (Beginning ) 200 $ 5.00 200
Jul-30 120 80
Aug-25 300 $ 5.25 380
Aug-30 250 130
Sep-03 450 $ 5.30 580
Purchase returns Sept 10 50 530
Sep-30 300 230
Oct-05 300 $ 5.40 530
Dec-08 250 $ 5.45 780
Dec-11 500 280
Feb-21 150 $ 5.50 430
Mar-18 100 $ 5.60 530
Apr-30 300 230
Sales returns May 02 30 260
May-04 250 $ 5.70 510
Jun-06 300 $ 5.85 810
Jun-30 460 350
Cost of goods sold and value of ending inventory
LIFO method
Date Details Unit Rate per unit
Amount
(unit * rate) Total Amount
Jun-30 Sold 120 $ 5.00 $ 600.00
Total 120 $ 600.00
Aug-30 Sold 80 $ 5.00 $ 400.00
170 $ 5.25 $ 892.50
Total 250 $ 1,292.50
Sep-30 Sold 130 $ 5.25 $ 682.50

3ACCOUNTING FUNDAMENTALS
170 $ 5.30 $ 901.00
Total 300 $ 1,583.50
Dec-11 Sold 230 $ 5.30 $ 1,219.00
270 $ 5.40 $ 1,458.00
Total 500 $ 2,677.00
Apr-30 Sold 30 $ 5.40 $ 162.00
250 $ 5.45 $ 1,362.50
20 $ 5.50 $ 110.00
Total 300 $ 1,634.50
Jun-30 30 $ 5.40 $ 162.00
120 $ 5.50 $ 660.00
250 $ 5.60 $ 1,400.00
60 $ 5.70 $ 342.00
Total 460 $ 2,564.00
30th April
Closing
stock 190 $ 5.70 $ 1,083.00
300 $ 5.85 $ 1,755.00
Total 490 $ 2,838.00
Moving average method
Date Details Unit
Rate per
unit
Amount
(unit * rate)
Aug-25 Sold 120
$
5.00
$
600.00
Aug-30 Sold 250
$
5.18
$
1,294.64
Sep-30 Sold 300
$
5.22
$
1,565.72
Dec-11 Sold 500
$
5.28
$
2,640.52
Apr-30 Sold 300
$
5.27
$
1,581.52
Jun-30 Sold 460
$
5.38
$
2,473.62
Dec-31
Closing
stock 490
$
5.38
$
2,634.94
Average rate has been calculated through dividing the total amount by total units
B. Recording missing inventory
Computation of lost inventory

4ACCOUNTING FUNDAMENTALS
units Average method
Closing inventory (a) 490 $ 2,634.94
Inventory left (b) 300 $ 1,613.23
Missing inventory (a-b) 190 $ 1,021.71
Journal entries for missing inventory
Inventory……………….D
r $ 1,021.71
Cost of goods sold…....Cr $ 1,021.71
C. Ledger account in T form
Inventory Control a/c
Particulars Debit Particulars Credit
opening balance $ 1,000.00 Sales $ 10,156.03
Purchases $ 11,790.97 Balance c/f $ 2,634.94
$ 12,790.97 $ 12,790.97
Cost of sales
Particulars Debit Particulars Credit
Inventory $ 10,351.50
balance $ 11,373.21 Inventory $ 1,021.71
$ 11,373.21 $ 11,373.21
Sales
Particulars Debit Particulars Credit
inventory $ 17,100.00 cost of sales $ 11,373.21
balance $ 5,726.79
$ 17,100.00 $ 17,100.00
Question 2
A. Depreciation schedule
(a) Straight line method
Particulars Amount

5ACCOUNTING FUNDAMENTALS
Cost of machinery including
10% GST (a)
$ 13,20,000.00
Residual value(b)
$ 1,00,000.00
Depreciable cost(c) = (a-b)
$ 12,20,000.00
Annual depreciation (c)/10
$ 1,22,000.00
(b) Sum of years digit method
Year Depreciation
base
Remaining
life of
truck
Depreciation
fraction
(remaining
life/total of
remaining
life)
Depreciation
Expenses
(depreciation
base*depreciation
fraction)
Book value
(remaining
BV –
depreciation
exp)
1
$ 12,20,000.00
10 0.18
$ 2,21,818.18 $ 10,98,181.82
2
$ 12,20,000.00
9 0.16
$ 1,99,636.36 $ 8,98,545.45
3
$ 12,20,000.00
8 0.15
$ 1,77,454.55 $ 7,21,090.91
4
$ 12,20,000.00
7 0.13
$ 1,55,272.73 $ 5,65,818.18
5
$ 12,20,000.00
6 0.11
$ 1,33,090.91 $ 4,32,727.27
6
$ 12,20,000.00
5 0.09
$ 1,10,909.09 $ 3,21,818.18
7
$ 12,20,000.00
4 0.07
$ 88,727.27 $ 2,33,090.91
8
$ 12,20,000.00
3 0.05
$ 66,545.45 $ 1,66,545.45
9
$ 12,20,000.00
2 0.04
$ 44,363.64 $ 1,22,181.82
10
$ 12,20,000.00
1 0.02
$ 22,181.82 $ 1,00,000.00
55 $ 12,20,000.00

6ACCOUNTING FUNDAMENTALS
(c) Declining balance method
Rate of depreciation as per straight line method = 1/10 = 10%
Year Depreciation @ 10%
Written down value(remaining
BV – depreciation exp)
1
$ 1,22,000.00 $ 10,98,000.00
2
$ 1,09,800.00 $ 9,88,200.00
3
$ 98,820.00 $ 8,89,380.00
4
$ 88,938.00 $ 8,00,442.00
5
$ 80,044.20 $ 7,20,397.80
6
$ 72,039.78 $ 6,48,358.02
7
$ 64,835.80 $ 5,83,522.22
8
$ 58,352.22 $ 5,25,170.00
9
$ 52,517.00 $ 4,72,653.00
10
$ 47,265.30 $ 4,25,387.70
(d) Units of production method
Particulars Amount
Cost of delivery truck (a) $ 13,20,000.00
Residual value (b) $ 1,00,000.00

7ACCOUNTING FUNDAMENTALS
Depreciable cost (c) = (a-b) $ 12,20,000.00
Expected production(d) 500000
Depreciation per unit(e) = c/d $ 2.44
Depreciation calculation
Year Kilometres Depreciation @ $ 2.4 per unit (km*2.4)
2014 50000
$ 1,22,000.00
2015 45000
$ 1,09,800.00
2016 55000
$ 1,34,200.00
2017 58000
$ 1,41,520.00
2018 60000
$ 1,46,400.00
Total 268000
$ 6,53,920.00
Profit under straight line method
Year ended 30
June
repairs and
maintenance
(a)
Depreciation
(b)
cost of operating
machinery(c)=(a+
b)
Profit before
depreciation
(d)
Profit after
depreciation(
d-c)
2014
70000
$
1,22,000.00 192000 350000 228000
2015
60000
$
1,22,000.00 182000 340000 218000
2016
90000
$
1,22,000.00 212000 355000 233000
2017 95000 $ 217000 360000 238000

8ACCOUNTING FUNDAMENTALS
1,22,000.00
2018
100000
$
1,22,000.00 222000 380000 258000
Total $
4,15,000.00
$
6,10,000.00 $ 10,25,000.00
$
17,85,000.00
$
11,75,000.00
Profit under sum of digits method
Year ended 30
June
repairs and
maintenanc
e (a)
Depreciation
(b)
cost of operating
machinery(c)=(a+
b)
Profit before
depreciation
(d)
Profit after
depreciation(
d-c)
2014 70000 $
2,21,818.18 $ 2,91,818.18 350000 128181.8182
2015 60000 $
1,99,636.36 $ 2,59,636.36 340000 140363.6364
2016 90000 $
1,77,454.55 $ 2,67,454.55 355000 177545.4545
2017 95000 $
1,55,272.73 $ 2,50,272.73 360000 204727.2727
2018 100000 $
1,33,090.91 $ 2,33,090.91 380000 246909.0909
Total $
4,15,000.00
$
8,87,272.73 $ 13,02,272.73
$
17,85,000.00
$
8,97,727.27
Profit under diminishing balance method
Year ended 30 repairs and Depreciation cost of operating Profit before Profit after

9ACCOUNTING FUNDAMENTALS
June maintenanc
e (a)
(b) machinery(c)=(a+
b)
depreciation
(d)
depreciation(
d-c)
2014 70000 $
10,98,000.00 $ 11,68,000.00 350000 -748000
2015 60000 $
9,88,200.00 $ 10,48,200.00 340000 -648200
2016 90000 $
8,89,380.00 $ 9,79,380.00 355000 -534380
2017 95000 $
8,00,442.00 $ 8,95,442.00 360000 -440442
2018 100000 $
7,20,397.80 $ 8,20,397.80 380000 -340397.8
Total $
4,15,000.00
$
44,96,419.80 $ 49,11,419.80
$
17,85,000.00
$-
27,11,419.80
Profit under units of production method
Year ended 30
June
repairs and
maintenanc
e (a)
Depreciation
(b)
cost of operating
machinery(c)=(a+
b)
Profit before
depreciation
(d)
Profit after
depreciation(
d-c)
2014 70000 $
1,22,000.00 $ 1,92,000.00 350000 228000
2015 60000 $
1,09,800.00 $ 1,69,800.00 340000 230200
2016 90000 $
1,34,200.00 $ 2,24,200.00 355000 220800
2017 95000 $ $ 2,36,520.00 360000 218480

10ACCOUNTING FUNDAMENTALS
1,41,520.00
2018 100000 $
1,46,400.00 $ 2,46,400.00 380000 233600
Total $
4,15,000.00
$
6,53,920.00 $ 10,68,920.00
$
17,85,000.00
$
11,31,080.00
B. Report to management
Introduction
Main objective of the report is to discuss various advantages and disadvantages of
different methods of depreciation method. Based on the discussion, best method of
depreciation will be recommended.
Discussion
Straight line method
Advantages
 It is the most simplest and method of charging depreciation
 It is straightforward, uncomplicated and provide same amount depreciation over the
useful life of the asset
 It is suitable for the items of lower costs like furniture as the asset can be written off
within the legal defined and estimated commercial life (Loon, Manicka and Har
2017)
Disadvantages
 Generally the assets are not used equally for all the years of its useful life. Hence,
providing equal amount of depreciation for all the years is not justified

11ACCOUNTING FUNDAMENTALS
 It does not consider efficiency loss or increase in the cost of repairs and maintenance.
 It cannot be used if useful life is not predictable
Sum of digits method
Advantages –
 It matches with the costs to the revenues as it charges more amount of depreciation in
initial years of the useful life of asset
 It reflects the difference of usage of the asset more accurately from one period to
other as compared to straight line method
Disadvantages –
 This method is confusing and is hard to calculate as compared to straight line method
 Depreciation is charges on diminishing amount that is generally offset by increase in
maintenance charges (Maffei 2016)
Diminishing balance method
Advantages –
 It is easy to implement and simple to use as depreciation is calculated on opening
balance of the asset
 It equalizes yearly burden on the profit and loss account and the amount is reduced
with the years of usage
 It is acceptable method for the purpose of income tax
 It matches with the revenue and cost of business. Higher amount of the depreciation
charged in initial years is balanced against higher level of revenue generated through
increased production (Wiehler, Cotter and Miller 2015)

12ACCOUNTING FUNDAMENTALS
Disadvantages –
 It charges larger amount of the depreciation in initial years
 Formula for obtaining the depreciation rate is applied only when residual value of the
asset is there.
Units of production method
Advantages –
 Actual depreciation for the asset with is reflected more closely various levels of the
activity
 Relates the depreciation with activity of depreciable asset
 Matches the cost with revenue more accurately
Disadvantages –
 If the depreciable asset does not have any activity, there will not be any expense for
depreciation irrespective of the fact that the machine is losing the value due to tear
and wear
 It cannot be applied equally to all depreciable assets (Del Giudice, Manganelli and De
Paola 2016).
Conclusion and recommendation
From the above discussion it can be recommended that straight line method of
charging depreciation is most appropriate. Further, based on the cost of operating the
machine and profit after depreciation it can be concluded that cost of operating the machine is
lowest and profit after depreciation is highest under straight line method.

13ACCOUNTING FUNDAMENTALS
Question 3
cost of machine (a) $ 33,000.00
Useful life (b) 12 years
Residual value (c) $ 3,000.00
Depreciable amount(d) =(a-c) $ 30,000.00
Depreciation per year (e) = (d/b) $ 2,500.00
Year Depreciation Accumulated depreciation written down value
30-06-2011 $ 1,250.00 $ 1,250.00 $ 31,750.00
30-06-2012 $ 2,500.00 $ 3,750.00 $ 29,250.00
30-06-2013 $ 2,500.00 $ 6,250.00 $ 26,750.00
30-09-2013 $ 625.00 $ 4,375.00 $ 28,625.00
sale value of the machine $ 17,000.00
Loss on sale (WDV-sale value) $ 11,625.00
Cost of new machine $ 25,000.00
Residual value $ 7,000.00
Depreciable amount $ 18,000.00
Revaluation of machine
Written down value $ 11,925.00
Revaluation upward 15%
Revalued amount $ 13,713.75
Revaluation profit (revalued
amt – WDV) $ 1,788.75
A. Relevant ledger account
Machine a/c
Particulars Debit Particulars Credit
Cash $ 33,000.00 Sales $ 17,000.00
Cash $ 8,000.00 P & L $ 11,625.00
Old machine $ 17,000.00 Balance $ 31,163.75
Revaluation profit $ 1,788.75
$ 59,788.75 $ 59,788.75
Depreciation a/c

14ACCOUNTING FUNDAMENTALS
Particulars Debit Particulars Credit
Accumulated
depreciation - new
machine $ 12,246.19 balance $ 12,246.19
$ 12,246.19 $ 12,246.19
Accumulated depreciation a/c
Particulars Debit Particulars Credit
Depreciation - new
machine $ 12,246.19
Revaluation profit
Particulars Debit Particulars Credit
Balance $ 1,788.75 Machine $ 1,788.75
$ 1,788.75 $ 1,788.75
B. Asset account in the financial statement
Year Depreciation Accumulated depreciation written down value
30-06-2011 $ 1,250.00
$
1,250.00
$
31,750.00
30-06-2012 $ 2,500.00
$
3,750.00
$
29,250.00
30-06-2013 $ 2,500.00
$
6,250.00
$
26,750.00
30-09-2013 $ 625.00
$
4,375.00
$
28,625.00
Year
Depreciatio
n Accumulated depreciation written down value
30-06-2014 $ 6,075.00
$
6,075.00
$
11,925.00
30-06-2015 $ 6,171.19
$
12,246.19
$
7,542.56
Asset will be recorded as following amount –
30th June 2012 - $29,250

15ACCOUNTING FUNDAMENTALS
30th June 2014 - $ 11,925
30th June 2015 - $ 7,542.56
C. Revaluation loss
Revaluation of machine
Written down value $ 11,925.00
Revaluation downward 15%
Revalued amount $ 10,136.25
Revaluation Loss (WDV – revalued amt) $ 1,788.75
Ledger account
Machine a/c
Particulars Debit Particulars Credit
Cash $ 33,000.00 Sales $ 17,000.00
Cash $ 8,000.00 P & L $ 11,625.00
Old machine $ 17,000.00 Revaluation loss $ 1,788.75
balance $ 27,586.25
$ 58,000.00 $ 58,000.00
Depreciation a/c
Particulars Debit Particulars Credit
Accumulated
depreciation - new
machine $ 10,636.31 balance $ 10,636.31
$ 10,636.31 $ 10,636.31
Year
Depreciatio
n Accumulated depreciation written down value
30-06-2014 $ 6,075.00 $ 6,075.00 $ 11,925.00
30-06-2015 $ 4,561.31 $ 10,636.31 $ 7,363.69

16ACCOUNTING FUNDAMENTALS
Reference
Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for
firm’s assets. In International Conference on Computational Science and Its Applications(pp.
214-227). Springer, Cham.
Loon, A.L.K., Manicka, K.M. and Har, T.W.L., 2017. Effective Depreciation Model for
Commercial Vehicles in Malaysia. Management & Accounting Review, 16(1).
Maffei, M., 2016. Amortization and Depreciation. Global Encyclopedia of Public
Administration, Public Policy, and Governance, pp.1-7.
Wiehler, D., Cotter, C.M. and Miller, G.S., 2015. Method and apparatus preventing waste of
us federal low income housing tax credits available for a mixed-income real estate projects
having low-income units and market-income units. U.S. Patent Application 14/833,625.