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:



Apr 3

Purchased 30 tins of tea by cheque for $6 700.


Bought 20 tins of tea, $4 200, on credit.


Tessa, the owner, contributed 35 tins of tea, $9 000, to the business. This was from her personal collection.


Sold 55 tins to Delsius Delicatessen for $38 000 on credit.


Tessa took 8 tins of tea costing $1 500 for an Easter gathering with her secondary school friends.


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.


a. Prepare the inventory account for the month ended 30 April 2020. Bring down the balance to the next month.


b. Using an accounting theory, explain how the inventory should be valued on 30 April 2020.


c. Calculate the gross profit for the month of April 2020. Show all workings.


d. State the source document used in the transaction on 7 April 2020.


[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 revenueSales returnsCost of sales

= $38 000 – 0 – 12 100

= $25 900