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.