Extended Trial Balance

Hi!

I have to prepare the extended trial balance for a make believe company and one of the notes is:

"Inventory was valued at £30,000; this figure excludes goods which were damaged by a burst water pipe and have been scrapped (no sale proceeds); Bishop Insurance has agreed to cover the loss of £250 incurred in writing off the goods."

Inventory on the balance provided is £35,000.

I don't understand how to make the adjustment. Can anyone explain?

I never done the level 2 and now I wish I had.

Thanks in advance!

Comments

  • DSV_Accounting
    DSV_Accounting Registered Posts: 5
    Deal with the two items separately. 1. Adjust inventory for the valuation at £30,000. 2. Adjust for the damaged inventory - note that this must be done because the question states that the £30,000 valuation excludes the effect of the damaged goods.
    1. Inventory on the TB provided is £35,000, so £5,000 must be charged to the P&L to show the reduction in the value of the inventory.
    DR Cost of sales £5,00₩
    CR Inventory £5,000

    2. Deal with the effect puff they damaged inventory items. They have been scrapped, and are no longer in inventory, so the financial statements must faithfully reflect that fact. The insurance WILL (i.e not yet paid up) cover the loss so the company won't lose out and, essentially, the asset has changed from inventory to an other debtor.
    Adjustment:
    DR Other debtors £250
    CR Inventory £250

    So you would end up with:
    Inventory balance £29,750
    CoS charged £5,000
    Other debtors debited £250 (plus any existing balance).

    For the avoidance of doubt, the £5,000 adjustment doesn't go to depreciation because it is not related to a fixed asset.

    Hope that helps!
    Daljit.
  • Multiplicator
    Multiplicator Registered Posts: 116
    well it helped me ! thx Daljit
  • AlisonSwanson
    AlisonSwanson Registered, Tutor Posts: 209
    edited August 2017
    You need to end up with inventory valued at 30,000 and the cost to the company of the inventory written off as 5,000 less the insurance proceeds 250 = £4750
  • DSV_Accounting
    DSV_Accounting Registered Posts: 5
    Thanks, Alison, it seems I may have misinterpreted this one. I've brushed up on insurance proceeds, and under UK GAAP they (as your answer says) should go to P&L!

    What is not clear on the above is: in that case, where would the debit side of the 250 go to? The question is worded to suggest that the 5k impairment is a separate adjustment to the 250. (So, still 'CR Inventory' 5k, to leave 30k). If that balance is supposed to remain at 30k per the answer, with the overall DR to P&L of 4,750, there is still a 250 left to DR somewhere.

    A further point... If that DR 250 went to any asset category, with the inventory carried at 30k, would the assets not be overstated by £250, because the damaged inventory doesn't actually exist (or is worth nothing due to the damage)?

    Thanks in advance for clarifying.
  • AlisonSwanson
    AlisonSwanson Registered, Tutor Posts: 209
    You had that bit correct. There would be an asset of £250 Accounts Receivable from the Insurance Company.

    Inventory has been reduced by £5000 for the amount of damaged stock.

    This is a cost to the company is £5000 less the insurance proceeds of £250

    The insurance company owes £250.

    I don't think this is on the AAT syllabus anywhere anymore ? Please correct me if I'm wrong.
  • DSV_Accounting
    DSV_Accounting Registered Posts: 5
    Thanks again.

    This comes down to question wording and style which you, as a tutor, will be far more au fait with than me. *So, anyone reading this should adjust as Alison has advised*.

    It works as the question is saying that the 30k inventory valuation *already* encompasses the damaged inventory. That's the key distinction.

    Your adjustment is therefore:
    DR Cost of sales £4,750
    DR Other Debtors £ 250
    CR Inventory £5,000

    I read the qustion as the damaged goods needed adjusting *in addition to* the revaluation adjustment. In that case, it would have been (full version):

    Revaluation (assuming excludes adjustment for damaged inventory)...
    DR Cost of sales £5,000
    CR Inventory £5,000

    Damaged scrapped inventory written off...
    DR Cost of sales £ 250
    CR Inventory £ 250
    Insurance proceeds (as soon as formally agreed by insurer, but before actual payment)
    DR Other Debtors. £ 250
    CR Cost of sales £250

    Hope you agree.

    Thanks for interjecting. At least I got some CPD done, looking at the full FRC version of FRS 102 until 2am! :-)
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