2020 PHS 3N POA EOY P2 Q2
2 Tessa Tea carries the most exquisite earl grey tea from the South of France. The business only buys tea from a trusted supplier, Eriel Earl Grey.
The business uses a First-In-First-Out method of inventory valuation.
On 1 April 2020, the business had 25 tins of tea worth $5 400.
The transactions for the month of April 2020 were as follows:
2020 | |||||
Apr 3 | Purchased 30 tins of tea by cheque for $6 700. | ||||
7 | Bought 20 tins of tea, $4 200, on credit. | ||||
16 | Tessa, the owner, contributed 35 tins of tea, $9 000, to the business. This was from her personal collection. | ||||
21 | Sold 55 tins to Delsius Delicatessen for $38 000 on credit. | ||||
26 | Tessa took 8 tins of tea costing $1 500 for an Easter gathering with her secondary school friends. | ||||
30 | A monthly stock check revealed that some teas were infested with insects and had to be discarded. The value of the remaining tea was $10 000. | ||||
REQUIRED
a. Prepare the inventory account for the month ended 30 April 2020. Bring down the balance to the next month.
[8]
b. Using an accounting theory, explain how the inventory should be valued on 30 April 2020.
[3]
c. Calculate the gross profit for the month of April 2020. Show all workings.
[2]
d. State the source document used in the transaction on 7 April 2020.
[1]
[TOTAL 14]
Based on prudence theory, assets should not be overstated.
As such, inventory is valued at the lower of cost and net realisable value.