2020 PHS 3E POA EOY P2 Q2

2020 PHS 3E POA EOY P2 Q2

2 Lilian is in the business of selling kitchen supplies. With families turning to home-cook meals, lunch boxes become a popular item especially for families with school-going children. She is currently looking at two types of lunch boxes recommended by her supplier.

Lunch box A: The product is manufactured in Japanese standards. It has a capacity of 650 ml and weighs only 230g. The material is heat-resistant up to 140 degrees Celsius. It has four point locks and thus minimises leakages. The product comes in four colours – orange, blue, green and yellow. The cost is $10.40 and can be retailed at $17.

Lunch box B: This product is manufactured in Japanese standards. It comes in three different capacities – 490ml, 640ml and 780ml, weighing 196g, 220g and 278g respectively. The lunch box is treated with antibacterial coating. It has two length point locks which make it air-tight. The product comes in only one colour – ivory. The costs and retail prices of the different sizes are as follows.

Capacity

Cost

Retail price

490 ml

$9.50

$16

640 ml

$10.50

$17.50

780 ml

$12.00

$22.00

REQUIRED

a. Recommend which product should Lilian purchase. Justify your recommendation with three reasons.

[7]

On 30 June 2020, a fire broke out at Lilian’s shop premises. This resulted in some of her inventory being damaged. An examination of the inventory revealed the following:

1. inventory costing $1 500 had to be discarded;

2. inventory costing $3 500 has net realisable value of $1 840;

3. remaining inventory costing $4 600 has net realisable value of $7 500.

REQUIRED

b. Explain the term “net realisable value”.

[1]

c. Using an accounting theory, explain how Lilian should value her inventory on 30 June 2020.

[3]

d. Give the journal entries to account for the loss in inventory. Narration is not required.

[2]

Lilian made an insurance claim on her inventory loss. The insurance company agreed to pay $2 500 as compensation.

REQUIRED

e. State how this claim would affect the profit for the year.

[1]

[TOTAL 14]

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Lilian should bring in Lunch Box A. [decision 1m]
any 3 reasons with substantiated evidence
[2m per reason; no substantiated evidence, no marks]
e.g. 1.made of good material which is heat-resistant.
This allows food which is hot to be put into the box.
e.g. 2. 4 point locks allowed the box to be really tight and thus no seepage.
e.g. 3. Appealing colours will attract buyers who can choose their favourite colour.
"e.g. 4. Item can be sold at a profit of $6.60 per box. At $17 it will attract buyers
"
compared to Lunch box B which is $0.50 more expensive for buyers.

Alternative answer:
a) Lilian should bring in Lunch Box B. [decision 1m]
any 3 reasons with substantiated evidence
[2m per reason; no substantiated evidence, no marks]
e.g. 1. Items come in different sizes and can cater to family needs for
child, mother and father.
e.g. 2. Item is treated with antibacterial coating and is thus healthier since
bacterial gets to food easily,the coating can protect the food.
e.g. 3. The locks are length-wise and thus provide greater air-tightness .
to prevent seepage of fluid
e.g. 4. Different sizes brings in different profit from $6.50 for the smallest
to $10 for the biggest. This means Lilian is likely to earn more on the average.

net realisable value refers to the selling price after accounting for costs incurred to make item saleable.[1]

Prudence theory requires business not to overstate its assets value. Thus,
inventory should be valued at lower of cost and net realisable value. 

Profit will be increased by $2 500

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