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Problems and solution Inflation Accounting

Problem 1 . Compute the net monetary result of RPMS & Co Ltd as on 31.12.2001. The relevant data are given below :

CashBook Debts

Creditors

Loan

Retail price index numbers :

1st January

31st December

Average for the year

 

1. 1.2001                 31.12.2001$                                $

5,000                          10,000

20,000                         25,000

15,000                        20,000

20,000                        20,000

200

300

240

 

 

    Solution:

Problem 2. Ascertain net monetary result as on 31.12.2001 from the data given below.

1.1.2001                                  31.12.2001

 

Cash at bank                                       15,000                                      21,000

Debtors                                                45.000                                    54,000

Creditors                                             75,000                                      50,000

General Price Index1.

1,1,2001                                    100

31.12.2000                                125

Average for 2001                                201

 

 

Solution :             Statement. showing the net monetary Result

 

Particulars                            Historical                    Adjusted            Price Level         Purchasing

Amount                      Factors               Adjust              Power Gain

$                                                      Amount ($)         or Loss ($)

Monetary assets at the

beginning of 2001

Cash at Bank                        15,000                          125/100                18,750

(15,000 X 125/100)

 

Accounts receivable                  45,000                    125/100              56,250

(45,000 X 125/100)

 

Add: Increase in monetary

Asset during the year

Cash at Bank (21,000 – 15,000) 6,000                    125/120              6,250

(6,000 X 125/120)

 

Accounts receivable

(54,000 – 45,000)                       9,000                   125/120                9,375

(9,000 X 125/120)

 

Total 75,000 90,625

 

Purchasing power loss

(90,625 – 75,000)                                                                                                                    15,625

Monetary liabilities at the

beginning of 2001

Accounts Payable                 75,000                     125/100                       93750

(75,000 X 125/100)

 

Less : Decrease in Accounts

Payable                                 25,000                          125/100                     31,250

(25,000 X 125/100)

50,000                                                             62,500

 

Purchasing Power Gain

(67,708 – 50,000)                                                                                                           12,500

 

Net Purchasing Power Gain/Less                                                                                   3,125

 

Problem 3. From the information given below calculate the net monetary gain or loss for the accounting year ending on 30th June 2002 :

Net monetary assets as on 1. 7. 2001Net monetary asset as on 30.6.2002

Transaction for the year are as follows :

(i) Cash sales

(ii) Credit sales

(iii) Credit purchase of goods

(iv) Wages incurred and paid

(v) Other operating expenses

(vi) Interest paid on 30.6.2002

Index as on 1. 7.2001

Index as on 30.6.2002

Average index for the year

$ 1,000$ 7,000

$ 8,000

$ 10,000

$ 7,000

$ 2,000

$ 1,000

$ 2,000

100

150

125

 

 

Solution:

 

Particulars                   Historic Cost                                       CPP

Accounting $              CF                    $

 

Net monetary asset on            1,000                    150/100                  1,500

01.07.2001

Add: Sales                              18,000             150/125                      21,600

19,000 23,100

Less: Purchases                       7,000               150/125                      8,400

Wages                                                 2,000               150/125                      2,400

Operating expenses                 1,000               150/125                       1,200

Interest                                    2,000               150/150                      2,000

12,000                                            14,000

Net monetary asset as on

30.06.2002                              7,000                                              9,100

Less: Monetary assets on

RCA basis -                                                                                      7,000

Net Monetary Loss                                                                             2,100

 

Problem 4. HR & Co has the following transaction on the given dates and price indices of the first Quarter of 2000 :

Price Index

Opening Balance (Jan. 1)                                $ 6,000                              100

Cash Sales (Feb.)                                            $ 17,500                           105

Payment to creditors (Mar. 1)                         $ 12,000                            108

Cash Purchase (Mar. 1)                                   $ 2,000                              108

Payment of expenses (Mar. 31)                      $ 2,000                             110

Closing Balance (Mar. 31)                              $ 7500                              110

Calculate monetary gain or loss

 

Solution : Conversion Table

 

Pa1ticulars                   Conventional              Conversion                  Converted

Accounting                 Factor                         Values

$                                                                     $.

Receipts :

Opening Balance                     6,000                           110/100                       6,600

Cash sales                                17,500                        110/105                       18,333

A                                             23,500                                                             24,933

Less : Payments :

Creditors                                 12,000                        110/108                      12,222

Purchases                                2,000                           110/108                          2,037

Expenses                                 2,000                           110/110                           2,000

B                                             16,000                                                                16,259

Closing Balance (A – B)          7,500                                                                   8,674

 

NOTE : If the Actual Balance is more than the Expected Balance, the difference is called    Monetary gain. If the Actual Balance is less than the Expected Balance, the difference is called

monetary loss.

 

Statement of Gain or Loss

$.

Expected Balance                                           8,674

Actual Balance                                                7 ,500

Monetary Loss                                                1,74v

Problem 5. ABC Ltd follows LIFO system. From the following particulars given  Below, ascertain the cost of sales and closing inventory under CPP method.

General price index

Inventory 31.12.2003             $  5,000                       150

Purchase for 2002                    28,000                        180  (Average  for  2002)

Inventory on 31.12.2004          60,000                        240

 

Solution :

Particulars 

 

(i) Cost of sales

Opening inventory

Add : Purchases

 

Total available for sale

Less : Closing inventory

 

LIFO valuation of cost

of Sales

 

(ii) Closing inventory

(a) Current purchases

(b) Rest from opening stock

HistoricAccounting

$

 

5,000

28,000

 

33,000

6,000

 

27,000

 

 

 

1,000

5,000

6,000

Conversion         ConversionFactor                    Value

 

 

 

 

 

 

 

 

 

240/180 = 1.33        36,000

 

1.33        1,333

240/150 = 1.60         8,000

9,333

 

 

Problem 6. The Balance Sheet of CBC Ltd as on 1.2.2003 and the income statement for the year ending 31.12.2003 are set out below.

 

 

Balance Sheet as on 1.1.2003

           Liabilities                            $                                AssetsShare capital                           10,000                       New machine

10% Debentures                       6,000                       Stock

Creditors                                   3,600                       Debtors

Cash

19,600

$15,000

2,400

1,200

1,000

19,600

 

 

 

 

 

 

 

 

Income Statement for the year ended on 31.12.2003

Sales

Cost of goods sold :

Opening stock (FIFO)

Purchases (Net)

 

Cost of goods available for sale

Less : closing stock (FIFO)

 

Gross profit on sales

Less : Operating expenses

Depreciation

Interest on debentures } paid on 31.12.2003

 

Retained earnings

 

 

2,400

4,600

 

7,000

2,000

 

 

800

1,500

600

$ 10,000 

 

 

 

 

 

5,000

5,000

 

 

 

2,900

 

2,100

 

Debtors and creditors balances remained constant throughout the year. General price indices were as given below.

on. 1.1.2003                200

Average for the year               240

on 31.12.2003             300

 

You are required to prepare the final accounts for the year 2003 after adjusting the price level changes under CPP method.

 

Solution : (i) Computation of Conversion Factors

(to represent current purchasing power of the rupee as on 31.12.2003)

1.1.2003 =300 /200 =1.5          31.12.2003 = 300/300 =1.00

Average for 2003 = 240= 1.25

 

(ii) Income statement as per CPP method for the year ending on 31.12.2003

 

           Particulars                                           HCA                           CF$                               $

Sales                                                          10,000                            1.25

 

Opening stock (FIFO)                                   2,400                         1.50

Purchases                                                      4,600                         1.25

 

Cost of Goods for sale                                 7,000

 

Less : closing stock (FIFO)                          2,000                          1.25

 

Cost of goods sold                                        5,000

 

Gross profit on sales                                     5,000

[Sales – CGSJ

Operating expenses                                   800                              1.25

Depreciation                                                1,500                         1.50

Interest on debentures                               600                              1.00

 

Total expenses                                         2,900

 

Income before general

price level gain or loss (GP-TE)             2,100

General price gain -

 

Retained Earnings                                2,100

CPP$.

12,500

 

3,600

5,750

 

 

9,350

2,500

6,850

5,650

 

 

 

1,000

 

2,250

 

600

 

3,850

1,800

2,550

 

4,350

 

(iii) Computation of monetary Gain or Loss

 

      Particulars 

Net Monetary Liabilities

as on 1.1.2003

Add : Purchases

Operating expenses

Interest on debentures

Total

Less : Sales

Net Monetary Liabilities as on 31.12.2003

Deduct : Monetary

Liabilities on HCA basis

Monetary Gain

HCA .(Unadjusted)

7,400

4,600

800

600

 

13,400

10,000

3,400

CF 

1.50

1.25

1.25

1.25

 

 

1.25

 CCP(Adjusted)

11,100

5,750

1,000

600

 

18,450

 

12,500

 

5,950

3,400

2,550

 

Workings:Cash

Opening Balance

Sales Receipts

Less : Payment on account

of purchases and expenses

 

$. 1,000

10,000

11,000

 

6,000

5,000