2020 PHS 3N POA EOY P2 Q2

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]

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Based on prudence theory, assets should not be overstated. 

As such, inventory is valued at the lower of cost and net realisable value.

Gross profit 

= Sales revenue – Sales returns – Cost of sales

= $38 000 – 0 – 12 100

= $25 900

Invoice

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