Question

Danone is a wholesale distribution business that sells a soybean drink product to supermarkets. The following relates to the business's activities during January 2020: January 1 Opening inventory 40,000 cartons - cost $3 per carton Purchases 20,000 cartons - purchase price $3.50 per 8 carton 23 Purchases 30,000 cartons – purchase price $3.60 per carton 31 Closing inventory (as per physical stocktake) 44,000 cartons Additional information i. The most recent selling price of the soybean drink is $6.50 per carton ii. Four thousand cartons of the closing inventory have passed their use-by date and cannot be sold for human consumption. However, they can be sold as pig feed for $1.80 per carton. iii. Freight from the supplier to Danone costs $1.20 per carton. Freight from Danone to supermarkets costs $1.40 per carton and would also apply to cartons sold for pig feed. Danone pays both sets of freight costs. Required Calculate the value of closing inventory as provided for in AASB 102, applying the FIFO (first-in-first-out) method. Justify all aspects of your calculation. Required: a) Danone sells a soy bean drink. Briefly explain why it uses the First in First Out cost flow method b) Calculate the value of closing inventory, in accordance with the requirements of AASB 102 Inventories. Justify ALL elements of your calculations c) Prepare the general journal entry for any write down in inventory according to AASB 102 Inventories

Answer 1

Ans-(a)

Soya bean drink (food item) is a with an expiry and hence old stocks cannot be allowed to pile up or else there will be damages on account of product expiry.Therefore the approach is to move consignments that are received first.

Ans-(b)

(assumed opening Invetory includes freight cost already)

DETAILS Opening Inventory Purchases-1 Purchase-2 Balance Total Units In Qty Rate Freight/Carton cost/Carton Value Sales Inventory Value 40000 3.00 120000 40000 0 0 20000 3.50 1.20 4.70 94000 6000 14000 65800 30000 3.60 1.20 4.80 144000 0 30000 144000 209800 17200 192600 Adjustment for damaged cartons (Working Note) Value of Inventory Amount 18800 65800*4000/14000 Working Note Inventory Cost of Expired Cartons (assumed out of Purchase-1 since that is older) NRV of the the Expired Stock (1.80-1.40) or 0.40/carton Value to be written down 1600 NRV is selling price less outward freight cost 17200 (18800-1600)

Inventory valued at lower of Cost or NRV.Here cost is lower than NRV for unexpired Stock.

For expired stock NRV is lower than cost hence written down

Ans-(c )

DETAILS DEBIT CREDIT Loss on Expiry 17200 Purchases 17200 (write down on Inventory recognized as expense in period)