hey, im a bit confused with this question attatched below.
i calculated stock-write down; historical cost (14000) - NRV(8000)
= 6,000 for 4 mazda cars
not sure if this is right tho.
Hey ffs1234,
I'll try and explain this as best as I can, so here goes:
Firstly you need to recognise that there are two things you are required to complete:
1. Accounting for the stock write down using the Lower of Cost and NRV rule (as you mentioned).
2. Adjusting for the stock gain.
First I would adjust for the stock gain, but remember using conservatism we use the lowest cost available in the stock card. So our lowest cost will have to be the 13600.
So we will have in the IN column
1 @ 13600 = 13600. (nice and easy)
And the BALANCE will be
4@ 14000
4 @13600
NEXT we account for the stock write down as some(not all) have been damaged. So the key with the NRV rule is that is by definition "estimated price less all costs incurred in the selling marketing and distribution of the stock items". So firstly as always in a stock card get rid of GST for anything. Then work out what your NRV is for each item of stock. In this case it is:
NRV= 10000 (HC) - $2000/5 (Advertising as this is a cost incurred in selling cars being written down)
= 10000 - 400
= 9600
This is our NRV which is lower than cost price so a stock write down is necessary. This is the amount that the 5 cars which were damaged now have to be revalued at.
Now to calculate the stock write down (keep in mind 5 cars are being written down... that is 4 of the $14000 and 1 of the $13600 Mazda 2).:
Therefore we have:
14000-9600 = the value we have to write down per each of the 14000 dollar Mazdas (i.e. in the OUT column of the stock card) = 4400.
But we have 4 of these Mazdas (see the balance of the stock card), so 4*4400 = 17600, will give us our total stock write down for the Mazdas that were initially $14000.
But this is only 4 of the cars so using FIFO we write down the 5th car which is the $13600:
13600 - 9600= 4000= the value we have to write down per each of the 13600 dollar Mazdas (i.e. in the OUT column of the stock card) = 4000.
So therefore in the OUT column of the stock card we have:
4 @ 4400 = 17600
1 @ 4000 = 4000
Therefore in the BALANCE column of the stock card we have:
5 @ 9600 = 48000 (notice our new balance which accounts for the 5 written down cars)
and leaving us with 8- 5 = 3 cars that have not been damaged @ 13600 = 40800
So finally our stock card will look like:
5 @ 9600
3 @ 13600
Btw, notice the question says that all of this happened on one day... 30th November. In VCAA I don't it matters which transaction you record first unless it actually says so. But I did the stock gain adjustment first b/c the marks allocated were 1 followed by 2 marks (usually a stock write down is worth more marks than a stock loss/gain adjusting entry especially in a stock card)... but don't quote me on that. I'd be interested to see what the solutions have to say. Also was that off a practice exam, i'd be interested to know which one.
Hope that makes sense,
p.s. i did this in a rush so anyone please double check and approve or disapprove.
Jo