Explain stock valuation, Cost Accounting

G. Mills was appointed a local agent for the High Power Mobile Workshop Bolt (HPMW-B) on 1 April 2009. The HPMW-B is manufactured by Mobile Equipment Ltd (MEL). The company charges its agents an annual service charge of $10,000 payable in advance each year on 1 April. In addition, agents pay MEL a commission of 5% of the gross profit on all sales.

During the past two years the demand for HPMW-B increased. At the same time, MEL had some raw material shortages and production difficulties. This led to a number of price increases in the manufacturer's price of the HPMW-B. However, the agents decided it would be unwise to pass these increased costs to their customers. Accordingly, throughout 2009 and 2010, a selling price of $52,000 per HPMW-B was maintained by the agents.

G. Mills' transactions up to 31 December 2010 are summarised as follows:

2009

Purchases

Sales

April

3 @ $38,000

 

June

 

1

August

2 @ $40,000

 

September

 

3

November

4 @ $40,500

 

December

 

1

 

 

 

2010

 

 

January

 

1

March

5 @ $30,000 (note 1)

 

May

 

6

July

 

1 (note 2)

August

2 @ $41,500

 

November

 

1

 

 

 

Notes:

1.   This was the purchases by G. Mills of the stock of an agent who had been declared bankrupt.

2.  On July 1 2010, G. Mills decided to use one of the HPMW-B as a display facility. Depreciation is to be provided on the Workshop used as a display facility at the rate of 20% per annum on cost. The Workshop will have a nil estimated residual value.

G. Mills' expenses, other than those payable to MEL, are at the rate of $15,000 per annum.

Required:

(b)   Prepare G. Mills' Income Statements using the LIFO and the FIFO methods of stock valuation, for

   i.  The period 1 April 2009 to 31 December 2009

   ii.  The year ended 31 December 2010

(c)    State and explain two reasons why stock valuation is important in accounting.

Posted Date: 2/26/2013 7:12:25 AM | Location : United States







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