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Dear sir,
I have a little doubt concerning example 1(Jurate and Dovile)
For the adjustment;
“Goods despatched by Jurata to Dovile before the year end with the related invoices to the value of $10,000 were not received by Dovile until 4 January 2010. The original cost was $10,000”-In your lecture you have said that when Dovile receives these goods, increase inventory+ payables by $10,000. Why so? What’s the logic behind?
Goods had not yet been received so how can we record it?“… you have said that when Dovile receives these goods …”
When Dovile receives these goods what do you think the double entry should be? When she receives them?
Strictly speaking, Dovile’s double entry in her accounting records will be Dr Purchases and Cr Payables (Jurate) but this exercise is only dealing with statement of financial position and we haven’t yet arrived at statement of profit or loss
We need to make this adjustment because the inventory that is in transit does belong to the group and yet it is neither in Jurate’s records (she has recorded the sale and the goods have been despatched so they aren’t in Jurate’s inventory) and they haven’t been received yet by Dovile (they are still in transit so they are not included in Dovile’s inventory)
So we PRETEND that Dovile has received them and make that necessary adjustment
If, and that’s a BIG IF, we were dealing with BOTH statements (profit or loss and financial position) in fact Dovile’s entries would be Dr Purchases and Cr Payables (Jurate) but the items are still in inventory so she would also need to increase closing inventory in her cost of sales calculation and increase inventory on the statement of financial position
Now I know that you will quickly have realised that, if Dovile increases her purchases figure and also increases her closing inventory figure, there will be no movement in the cost of sales figure so no change to retained profits
So, for the sake of the correct and full recording of group assets, we need to increase closing inventory and increase payables on the statement of financial position
OK now?
Dear sir,
Concerning example 2 (Petras and Signe), I do have understand the logic behind decreasing the retained earnings of Signe. However, I am still having some difficulties to understand the logic of decreasing Signe’s inventory.-Why should we decrease the inventory?
-When you say, “inventory is over-valued”, what do you mean by that?Thanks in advance.
What can you possibly misunderstand with “inventory is over-valued”, what do you mean by that?”
The value attributed to inventory is too much. Is that better?
The group inventory following an intra-group transfer is overvalued so far as the group is concerned because it includes the mark-up / profit element that has been added by the seller
So that’s why we have to decrease the value of the inventory
Better?
What I am trying to say is that how the inventory is overvalued? What’s the explanation behind it?
Because it includes an element of profit that has been added on by the selling company and that makes the cost to the buying company greater than the inventory’s original cost
Imagine that you have a $2 candy bar in your right trouser pocket and you transfer that $2 candy bar to your left trouser pocket saying to yourself “Now my left trouser pocket owes $2.50 to my right trouser pocket and my right trouser pocket has made a 50 cent profit”
That’s ok – not a problem at all
But when we reach the year end and that candy bar is still in your left hand pocket, what is the value of that candy bar so far as the TROUSER GROUP is concerned?
How can the value of a candy bar increase when all you have done is transfer it from one pocket within the group to another pocket within the same group
Is that better?
Concerning example 4(Laimonas and Kristine),
-Why $9000 has been added to Laimonas’s retained earnings. What’s the logic?
-In the balance sheet, $1,000 has been put which represent the NCI proposed dividend?
Where does $1,000 come from? What’s the understanding behind it?This is in fact the same topic. It is chapter 8 inter entiry transaction, example 4
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