Calculation of inventory at the lower of cost

Assignment Help Financial Accounting

Reference no: EM132065535

Jassal Music Inc. is located in Edmonton, Alberta, and reports its financial information using IFRS. The company has six primary lines of business:

It sells musical instruments.

It sells related music products (including sheet music, strings, replacement parts, cases). It has a school rental program (for musical instruments).

It provides music lessons.

It tunes and repairs musical instruments.

It sells a specialty brand line of Allegro Quality Instruments.

The company has eight staff members, all of whom (except for you, the accountant) teach music and work in the sales area when they are not teaching. The company's unadjusted trial balance at December 31, 20X4, is presented below:

	Debit	Credit
Cash	275,612.00
Accounts receivable - trade	24,500.00
Allowance for doubtful accounts		85
Accounts receivable - school program	48,000.00
Prepaid insurance	25,500.00
Inventory - school rentals	36,990.00
Inventory - instrument sales	114,524.00
Inventory - related products	35,700.00
Inventory - not owned	51,750.00
Note receivable - R. Tower	3,695.00
Investment in PLZ shares	84,240.00
Investment in General Company bonds	250,000.00
Investment in mortgage option	5,000.00
Investment in mortgages	512,000.00
Land	279,400.00
Warehouse	126,000.00
Accumulated depreciation - warehouse		27,550.00
Store	368,400.00
Accumulated depreciation - store		78,285.00
Tools and other equipment	38,850.00
Accumulated depreciation - tools and other equipment		24,605.00
Vehicles - delivery, service, sales	35,000.00
Accumulated depreciation - vehicles		14,400.00
Office equipment	8,500.00
Accumulated depreciation - office equipment		3,400.00
Computer equipment	12,300.00
Accumulated depreciation - computer equipment		4,950.00
Customer list	10,000.00
Accumulated amortization - customer list		5,000.00
Accounts payable		242,700.00
Payroll taxes payable		4,240.00
Short-term note payable		3,500.00
Current portion of long-term debt		7,200.00
Long-term debt		36,000.00
Preferred shares (2,000 shares outstanding)		50,000.00
Common shares (750 shares @ $400 / share)		300,000.00
Retained earnings		321,625.00
Revenue - instrument sales		2,637,358.00
Revenue - sales - related products		571,577.00
Revenue - school rental program		122,000.00
Revenue - lessons		198,600.00
Revenue - tuning and repair		64,100.00
Revenue - Allegro sales		388,125.00
Cost of goods sold - instrument sales	1,423,598.00
Cost of goods sold - related products	355,794.00
Cost of goods sold - Allegro	310,500.00
Cost of goods sold - lessons, tuning and repair, and other	38,600.00
Advertising	4,500.00
Audit and legal fees	13,907.00
Interest expense - long-term debt	3,225.00
Insurance expense - property, building and casualty	15,200.00
Insurance - automobile	2,500.00
Investment transaction costs	309
Janitorial services	7,800.00
Office expenses	4,800.00
Property taxes	18,600.00
Training and development	3,200.00
Telephone	6,685.00
Utilities	7,200.00
Wages, salaries and benefits	432,000.00
Dividend income		2,025.00
Gain (loss) on investment in PLZ shares		52,785.00
Interest income - note receivable		339
Mortgage interest income		57,980.00
Gain / loss on purchase of property, plant and equipment		150
Gain / loss on sale of property, plant and equipment		800
Income tax expense	225,000.00
		$5,219,379.00

The following are the main events that have occurred in the company's fiscal year ending December 31, 20X4:

1. Jassal Music renewed the commercial and business insurance policy in August 20X4 for the year commencing September 1, 20X4. The company initially recorded the $25,500 payment as a prepaid expense.

2. At December 31, 20X4, Jassal Music had one Allegro grand piano in its store. Jassal Music will pay Allegro for the piano only when it has a firm sale of the instrument to an external customer. The piano retails on the market for $62,500. The cost of the piano to Jassal Music, which it will pay to Allegro only if it is sold, will be $51,750. In the meantime, as long as the instrument remains on-site at the company's store, Jassal Music management has decided to record the cost of the instrument in inventory and set up an account payable for the same amount.

3. The company has contracts with customers in the school rental program that run for the full academic year (September to June). Customers pay monthly for the instrument rentals. For the academic year of September 20X3 to June 20X4, the rental income earned from the program was $7,000 per month. Six months of rental income from the 20X3-20X4 academic year is recorded by Jassal Music as revenue for its 20X4 fiscal year. The monthly rental income earned by the company on the school rental program for the academic year of September 20X4 to June 20X5 is $8,000 per month. No other rental income was earned by the program in the 20X4 fiscal year.

4. During the 2014 fiscal year, Jassal Music sold a violin that would normally sell for $1,650 for a computer system that sells for $1,800. The transaction was recorded as follows:

DR Computer equipment	1,800
CR Revenue	1,650
CR Gain on purchase of equipment	150
DR Cost of goods sold	1,500
CR Inventory	1,500

5. Jassal Music records its merchandise inventory into the following four categories: rental instruments and equipment ("Rentals")

instruments and equipment for sale ("Items") related products

Allegro instruments (not owned)

The breakdown of inventory held by Jassal Music as at December 31, 20X4, is as follows.

Jassal Music
Inventory
December 31, 20X4

	Number of
Inventory item	units	Cost per unit	NRV per unit
Rentals
Chime sets	75	$	225	$	79
Cymbals	75	$	15	$	5
Drum sets	50	$	175	$	61
Flutes	75	$	100	$	35
Violins	75	$	110	$	39
Guitars (school program)	120	$	62	$	22
Keyboards	15	$	250	$	88
Recorders (school program)	120	$	7	$	2
Saxophones	20	$	225	$	79
Triangles	80	$	5	$	2
Xylophones	20	$	135	$	47
Instrument stands	250	$	80	$	36
Items for sale
Chime sets	3	$	750	$	790
Cymbals	4	$	70	$	85
Drum sets	3	$	450	$	525
Flutes	5	$	650	$	775
Violins	3	$	1,500	$	1,650
Guitars (school program)	7	$	62	$	45
Guitars - acoustic	9	$	125	$	132
Guitars - electric	12	$	190	$	225
Keyboards	4	$	2,200	$	2,100
Pianos - entry	3	$	2,300	$	2,500
Pianos - introductory	5	$	4,500	$	4,900
Pianos - intermediate	2	$	12,000	$	14,200
Pianos - professional	1	$	22,500	$	25,000
Pianos - upright	2	$	5,000	$	7,500
Recorders (school program)	25	$	7	$	10
Saxophones	3	$	575	$	675
Ukuleles	5	$	55	$	65
Xylophones	4	$	245	$	300
Instrument stands	15	$	80	$	75
Related products
Sheet music (scores)	2,800	$	12	$	18
Bows	25	$	12	$	22
Picks	200	$	2	$	5
Strings (packages)	75	$	12	$	10
Metronomes	25	$	20	$	45

Allegro (non-owned)
Grand piano	1	$ 51,750	$ 62,500

6. The majority of sales conducted by Jassal Music are in cash; other than the school district, very few customers are offered credit terms. Historically, less than 1% of year-end trade accounts receivable (excluding the school program) is not collected. There have never been any bad debts from the school program. At year end, Jassal Music adjusts the allowance for doubtful accounts to be 1% of the trade receivables, excluding trade receivables from the school program.

7. On October 19, 20X3, Jassal Music sold a delivery vehicle that it no longer needed for $6,500. The company took a note receivable from the customer, Ryan Tower Inc., for this sale. The terms of the note state that it must be repaid in full within three years; however, there is no fixed payment schedule. The note also bears interest at 12% per annum, which is equal to the market rate of interest.

Ryan Tower has made the following payments on the note receivable to date:

Date of payment	Total payment	Applied to interest
December 31, 20X3	$	1,500.00	$ 156.00
April 15, 20X4	$	1,000.00	$ 177.99
August 6, 20X4	$	800.00	$ 161.01

The schedule below has not been updated since the December 31, 20X3, payment.

	Days	Amount	Interest			Amount
Date	outstanding	outstanding	rate	Interest	Payment	outstanding
October 19, 20X3		$6,500.00	12.00%			$6,500.00
December 31, 20X3	73	$6,500.00		$156.00	$1,500.00	$5,156.00
April 15, 20X4		$5,156.00				$5,156.00
August 6, 20X4		$5,156.00				$5,156.00
December 31, 20X4		$5,156.00				$5,156.00

The payments were applied appropriately, first to interest and then to principal. However, interest income has not been accrued to December 31, 20X4.

Required:

Submit the following:

1. A list of the adjusting journal entries with supporting calculations as necessary

2. A calculation of inventory at the lower of cost or net realizable value

3. An adjusted trial balance (year-end working paper) based on the adjusting journal entries made in requirement 1)

Note: All three questions in IFRS standards.

Reference no: EM132065535

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