Page 34 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 2: Price Level Accounting

Sales, purchases, operating expenses (excluding depreciation) took place evenly throughout the Notes
year. Inventories are priced according to first in, first out method. Goods in closing inventories
were acquired evenly throughout the year. The dividend of `40,000 was declared and paid at the
end of 2008. Income tax accrued throughout the year.
You are required to recast the above statement taking into account the price level adjustments
under CPP Method. The general price indices are as follows:
At the end of year 2007 (and beginning of the year 2008) 150
Average for the year 2008 157.5
At the end of the year 2008 163.8

Solution:
It will be necessary to compute conversion factor for restating the figures under CPP Method.

Conversion factors
For items to which Price Index at the 163.8/150 = 1.092
beginning of 2008 is applicable,
For items to which Average Index is applicable 163.8/157.5 =1040
For Items to which Price Index at the end of 2008 is applicable = 163.8/163.8 = 1

ABC Limited
Income Statement
For the year ending 31st Dec, 2008

As per Conversion factor Restated
historical cost under CPP
basis Method
(`) (`)
Sales (1) 8,00,000 1.040 8,32,000
Cost of goods sold:
Opening inventory 1,50,000 1.092 1,63,800
Add: Purchases 5,00,000 1.040 5,20,000
Cost of goods available for sale 6,50,000 6,83,800
Less: Closing inventory
(Out of current purchases) 1,30,000 1.040 1,35,200
Cost of goods sold (2) 5,20,000 5,48,600
Gross profit (l)-(2)= 3 2,80,000 2,83,400
Operating expenses 96,000 1.040 99,840
(excluding depreciation)
Depreciation 24,000 21,000 × 1.092 26,052
= 22,932
3,000 × 1.040
= 3,120
Total operating expenses (4) 1,20,000 1,25,892
Net profit before "general price level gain
or
Contd...

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