Record the transactions as journal entries under the following methods:
A. Prepare journal entries to record the events mentioned, as well as the statement of financial performance for the year ended 30 June 2004 and the statement of
financial position as at 30 June 2004, under the following methods:
(a) conventional accounting: historical cost, financial capital, nominal dollars (b) current cost accounting: current cost, financial capital, nominal dollars.
Distinguish between realised and unrealised holding gains or losses.
B. Convert the current cost financial statements to a constant dollar (end-of-current-year) basis.
Reflex Limited.
Part A
Conventional Current Cost
1. Inventory $30 000 $30 000
Accounts Payable $30 000 $30 000
2. (a) Accounts Receivable 75 000 75 000
Sales Revenue 75 000 75 000
(b) Inventory (5000 × $3) + (1000 × $4) 19 000
Unrealised Holding Gain 19 000
(c) Cost of Goods Sold 30 000 45 000
Inventory 30 000 45 000
(d) Unrealised Holding Gains 15 000
Realised Holding Gains ($45 000 – $30 000) 15 000
3. (a) Inventory (1000 × $3) 3 000
Building ($200 000 – $100 000) 100 000
Land ($20 000 – $10 000) 10 000
Investment in Y stock 5 000
Discount on Bonds Payable 4 968
Unrealised Holding Gains 122 968
(b) Depreciation Expense (see below) 10 000 15 000
Accumulated Depreciation 10 000 15 000
(c) Unrealised Holding Gains (see below) 5000
Realised Holding Gains 5000
(d) Unrealised Holding Gains (see below) 15 000
Accumulated Depreciation 15 000
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4. (a) Cash 10 000
Land 5000 10 000
Gain on Sale of Land 5000 10 000
(b) Unrealised Holding Gains (see below) 5000
Realised Holding Gains 5000
5. Operating Expenses 15 000 15 000
Interest Expense (see below) 5 000 5 195
Cash 20 000 20 000
Realised Holding Gains 195
Computation of current cost depreciation:
$200 000 + $100 000/2 = $150 000 average gross current cost of building
$150 000 × 10% = $15 000 depreciation.
Computation of realised holding gain for building:
Current cost of depreciation $15 000 Historical cost of depreciation 10 000
$ 5 000 Computation of backlog depreciation:
$200 000 × 20% = $40 000 Total accumulated depreciation, for 2 years needed on statement of financial position – 15 000 Depreciation recorded this year (second year) – 10 000 Depreciation recorded last year (first year)
0 No backlog depreciation recorded last year, because no change in current cost
$25
000 Total recorded accumulated depreciation
$15
000 Amount needed to catch up to new basis of
$200 000 Computation of current cost interest expense:
Find present value of bonds at beginning of year, using average rate of 11%.
For 9 periods, 11%:
principal of $50 000 × 0.39092 = $19 546 annuity of $5000 × 5.53705= 27 685
total $47 231
$47 231 × 11% = $5195 interest expense.
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REFLEX LIMITED
Statement of Financial Performance For Year Ended June 2004
(conventional)
Sales revenue $ 75 000
Cost of goods sold 30 000
Gross profit $ 45 000
Operating expenses:
Depreciation $10 000
Other operating 15 000 25 000
Operating profit $ 20 000
Other items:
Interest expense $5 000
Gains on sale of land (5 000) 0
$ 20 000 REFLEX LIMITED
Statement of Financial Performance For Year Ended June 2004
(current cost)
Sales revenue $ 75 000
Cost of goods sold 45 000
Gross profit $ 30 000
Operating expenses:
Depreciation $15 000
Other operating 15 000 30 000
Profit from regular operations 0
Other items:
Interest expense 5 195
Loss from operating activities $ (5 195)
Realised holding gains $ 25 195
Realised profit $ 20 000
Unrealised holding gains 101 968
Net profit $121 968
Comparing the two statements of financial performance, we see that the realised profit is the same. This is always so. What the current cost statement of financial performance shows, which the conventional does not, is that the profit is all due to holding activities.
Operating activities resulted in a loss.
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Statement of Financial Position June 2004
(conventional)
Cash $ 10 000 Accounts Payable $ 50 000
Accounts Payable 75 000 Bonds Payable 50 000
Inventory 5,000
Investment in Y 20 000 Paid Up Capital 75 000
Building $100 000 Retained Earnings 20 000
Accum. Depreciation 20 000 80 000
Land 5 000
Total $195 000 Total $195 000
Statement of Financial Position June 2004
(current cost)
Cash 10 000 Accounts Payable $ 50 000
Accounts Receivable 75 000 Bonds Payable $50 000
Inventory 12 000 Discount 4 968 45 032
Investment in Y 25 000
Building $200 000 Paid Up Capital 75 000
Accum. Depreciation 40 000 160 000 Retained Earnings 121 968 Land 10 000
Total $292 000 Total $292 000
Part B
Statement of Financial Performance For Year Ended June 2004
Nominal dollars Constant dollars
Sales Revenue $75 000 × 120/105 = $85 714
Cost of goods sold 045 000 × 120/105 = 51 429
Gross profit $34 285
Expenses:
Depreciation 15 000 × 120/108 = $16 667
Other operating 15 000 × 120/120 = 15 000 667 31
Profit from regular operations $ 2 618
Interest expense 5 195 × 120/108 = 5 772
Loss from operating activities $ (3 154)
Realised holding gains 25 195 (see below) 249 25
Realised profit $22 095
Unrealised holding gains 101 968 (see below) 301 91
Profit before purchasing power loss 113 396
Purchasing power loss (see below) 6 428
Net profit 968106
Realised holding gains:
For inventory sold:
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Current cost of goods sold $45 000 × 120/105 = $51 429 Historical cost of goods sold 30 000 × 120/105 = 34 286
$15 000 $17 143
For building used:
Current cost depreciation $15 000 × 120/108 = $16 667 Historical cost depreciation 10 000 × 120/90 = 13 333
$ 5 000 $ 3 334 For land sold:
Current cost $10 000 × 120/120 = $10 000
Current cost (beginning year) 5 000 × 120/100 = 6 000
$ 5 000 $ 4 000
For use of money (interest):
Current cost of interest $ 5 195 × 120/108 = $ 5 772 Historical cost $ 5 000 × 120/120 = 000 5
$ 195 $ 772
Computation of total raised holding gains:
$17 143 3 334 4 000 772
$25 249
Nominal dollars Constant dollars Unrealised holding gains:
Ending inventory:
Current cost $12 000 × 120/120 = $12 000
Historical cost 5 000 × 120/100 = 6 000
7 000 $ 6 000
Since beginning inventory is the same for both current cost and historical, there is no need to calculate it.
Building:
At December 31, Year 10:
Net current cost $160 000 × 120/120 = $160 000
Net historical cost 80 000 × 120/90 = 106 667
Unrealised holding gain $ 80 000 $ 53 333
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At January 1, Year 10:
Net current cost $ 90 000 × 120/100 = $108 000
Net historical cost 90 000 × 120/90 = 120 000 Unrealised holding loss 0 $ (12 000) Unrealised holding gain for year $ 80 000 $ 65 333 Land (unsold)
Current cost $10 000 × 120/120 = $10 000
Current cost (beginning of year) 5 000 × 120/100 = 6 000
Unrealised holding gain $ 5 000 $ 4 000
Investment in Y
Current cost $25 000 × 120/120 = $25 000
Historical cost 20 000 × 120/100 = 24 000
$ 5 000 $ 1 000
Bonds Payable:
Current cost $45 032 × 120/120 = $45 032
Historical cost 50 000 x 120/100 = 60 000
$ 4 968 $14 968
Computation of total unrealised holding gains:
$ 6 000 65 333 4 000 1 000 14 968
$91 301 Computation of purchasing power loss:
Nominal dollars Constant dollars
Beginning balance of net monetary items: 0 0
Sources:
Sales of merchandise $75 000 × 120/105 = $85 714
Sale of land 10 000 × 120/120 = 10 000
Total $85 000 $95 714
Uses:
Purchases of merchandise 30 000 × 120/105 = 34 286 Expenses (including interest) 20 000 × 120/120 = 20 000
Total uses $50 000 $54 286
Ending balance $35 000 $41 428
Deduct nominal amount 35 000
Purchasing power loss $ 6 428
The computation above does not include bonds payable, because it was considered in the calculation of holding gains previously.
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7.3Required:
Determine the holding gains/losses for Year 2, net of inflation (i.e. on a constant dollar basis) for the inventory, land and equipment. Use average-for-year dollars.
Distinguish between realised and unrealised holding gains (or losses).
Murray Pty Ltd
Nominal dollars Constant dollars Realised holding gains:
For inventory sold:
Current cost of goods sold (50 × $500) $25 000 × 123/123 =$25 000 Historical cost of goods sold (50 × $400) 20 000 × 123/100 = 24 600
Realised holding gain $ 5 000 $25,400
For equipment used:
Current cost depreciation
[($12 000 + $15 000)/2 = $13 500 × 10%] $ 1 350 × 123/123 = $1 350 Historical cost depreciation 1 000 × 123/100 = 1 230
Realised holding gain $ 350 $ 120
Unrealised holding gains:
For inventory not sold:
Inventory on December 31, Year 2:
Current cost (100 × $520) $52 000 × 123/130 =$49 200 Historical cost (100 × $480) 48 000 × 123/115 = 51 339
$ 4 000 $ (2 139)
Inventory on January 1, Year 2:
Current cost (40 × $480) $19 200 × 123/115 =$20 536 Historical cost (40 × $400) 16 000 × 123/100 = 19 680
$ 3 200 $ 856
Unrealised holding gain (loss) for
Year 2 $400 $ (2 781)
For Equipment:
On December 31, Year 2:
Net current cost $12 000 × 123/130 =$11 354
Net historical cost 8 000 × 123/100 = 9 840
$ 4 000 $ 1 514
On January 1, Year 2:
Net current cost $10 800 × 123/115 =$11 551
Net historical cost 9 000 × 123/100 = 11 070
$ 1 800 $ 481
Unrealised holding gain for Year 2 $ 2 200 $ 1 033
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For Land:
On December 31, Year 2:
Current cost $68 000 × 123/130 =$64 338
Historical cost 50 000 × 123/100 = 61 500
$18 000 $ 2 838
On January 1, Year 2:
Current cost $60 000 × 123/115 =$64 174
Historical cost 50 000 × 123/100 = 61 500
$10 000 $ 2 673
Unrealised holding gain for Year 2 $ 8 000 $ 165 Since the historical cost for the land is the same for December 31 and January 1, the following calculation would suffice:
Current cost, December 31, Year 2 $68 000 × 123/130 =$64 338 Current cost, January 1, Year 2 60 000 × 123/115 = 64 173 Unrealised holding gain for Year 2 $ 8 000 $ 165
7.4Required:
A. Present a set of financial statements in accordance with the requirements of SAP 1 for the 2003–04 reporting period.