Current Cost Accounting

Problem 1 Simple company purchased land on January 1, 2018 for P500,000 cash. On December 31, 2018, the land has a current replacement cost of P600,000. On December 31, 2019, the land has a current replacement cost of P750,.000. The entity sold the land for P1,000,000 cash on December 31, 2020. On this date , the current replacement cost of the land is P800,000. 1.

2.

3.

4.

What is unrealized holding gain to be reported in 2018? a. 600,000 b. 500,000 c. 100,000 d. 0 What is unrealized holding gain to be reported in 2019? a. 250,000 b. 150,000 c. 100,000 d. 0 What is the realized holding gain to be reported in 2020? a. 300,000 b. 250,000 c. 50,000 d. 0 What is gain on sale of land to be reported in 2020? a. 500,000 b. 250,000 c. 200,000 d. 150,000

Question 1 answer C

Current cost – December 31, 2018

600,000

Historical cost

500,000

Unrealized holding gain

100,000

For non-depreciable asset or land, unrealized holding gain or loss is the difference between the current cost and historical cost of the asset unsold at the end of the year. Question 2 answer B Current cost – December 31, 2019

750,000

Historical cost

500,000

Cumulative unrealized holding gain in 2019

250,000

Unrealized holding gain recognized in 2018

(100,000)

Unrealized holding gain to be reported in 2019

150,000

Question 3 answer C Current cost – December 31, 2020

800,000

Historical cost

500,000

Realized holding gain in 2020

300,000

Unrealized holding gain reported in 2018 and 2019

(250,000)

Realized holding gain to be reported in 2020

50,000

For non-depreciable asset, realized holding gain or loss is the difference between current cost at the same time of sale and historical cost of the asset sold. Question 4 answer C Sale price

1,000,000

Current cost – December 31, 2020

(800,000)

Gain on sale of land

200,000

Problem 2 Easy Company acquired an equipment on January 1, 2018 for P5,000,000. Depreciation is computed using the straight line method. The estimated useful life of the equipment in 5 year with no residual value. The current cost of the equipment is P7,500,000 on December 31, 2018. 1. What is the amount of depreciation that should be reported in the current cost income statement for 2018? a. 1,500,000 b. 1,250,000 c. 1,000,000 d. 2,500,000 2. What is the realized holding gain on the equipment to be reported in 2018? a. 500,000 b. 250,000 c. 300,000 d. 0 3. What is the unrealized holding gain on the equipment to be reported in 2018? a. 1,250,000 b. 2,500,000 c. 2,000,000

d. 1,500,000

Question 1 answer B Historical cost

5,000,000

Current cost

7,500,000

Total

12,500,000

Average current cost (12,500,000 / 2)

6,250,000

Depreciation on average current cost (6,250,000 / 5)

1,250,000

Under current cost accounting, depreciation is based on a average current cost. Question 2 answer B Depreciation on average current cost (6,250,000 / 5)

1,250,000

Depreciation on historical cost (5,000,000 / 5)

1,000,000

Realized holding gain

250,000

For depreciable asset, realized holding gain or loss is the difference between depreciation based on average current cost and depreciation based on historical cost. Question 3 answer C Current cost

7,500,000

Accumulated depreciation (7,500,000 / 5)

1,500,000

Net current cost

6,000,000

Historical cost

5,000,000

Accumulated depreciation (5,000,000 / 5)

1,000,000

Carrying amount

4,000,000

Net current cost

6,000,000

Carrying amount

4,000,000

Unrealized holding gain

2,000,000

For depreciable asset, unrealized holding gain or loss is the difference between net current cost and carrying amount of the asset.

Problem 3 Weaver Company reported the following property, plant and equipment on December 31,2018:

Year Acquired 2016 2017 2018

Percent depreciated 30 20 10

Historical cost 1,000,000 300,000 400,000

Current cost 1,400,000 380,000 440,000

The entity calculated depreciation at 10% straight line. There were no disposals of property. A full year depreciation was charged in the year of acquisition and no depreciation in the year of disposal. What total amount should be reported as net current cost of the property, plant and equipment on December 31,2018? a. 1,160,000 b. 1,300,000 c. 1,680,000 d. 1,820,000 Solution 3 answer C 2016

(1,400,000 * 70%)

980,000

2017

(380,000 * 80%)

304,000

2018

(440,000 * 90%)

396,000 1,680,000

Year acquired 2016 2017 2018

Current cost 100 100 100

Percent depreciated 30 20 10

Net current cost 70 80 90

Problem 4 Bar Company provided the following information for 2018: Historical cost

Units

Inventory, January 1

1,060,000

20,000

Purchased during the year

5,580,000

90,000

Goods available for sale

6,640,000

110,000

Inventory, December 31

(2,520,000)

(40,000)

Cost of goods sold

4,120,000

70,000

The current cost per unit of inventory was P58 on January 1, 2018 and P72 on December 31,2018. 1. In the income statement for 2018 restated to current cost, what amount should be reported as cost of goods sold?

a. b. c. d.

5,040,000 4,550,000 4,410,000 4,060,000

2. In the income statement for 2018 restated to current cost, what amount should be reported as realized holding gain? a. 980,000 b. 430,000 c. 920,000 d. 560,000 3. Under current cost accounting , what amount should be reported as inventory on December 31,2018? a. 2,600,000 b. 2,880,000 c. 2,520,000 d. 2,320,000 4. What amount should be reported as unrealized holding gain on December 31, 2018? a. 560,000 b. 360,000 c.180,000 d. 80,000

Solution 4 Question 1 answer B Current cost per unit – January 1

58

Current cost per unit – December 31

72

Total

130

Average current cost (130 / 2)

65

Cost of goods sold at average current cost (70,000 * 65)

4,550,000

Question 2 answer B Cost of goods sold at average current cost

4,550,000

Cost of goods sold at historical cost

4,120,000

Realized holding gain

430,000

Question 3 answer B Inventory, December 31 at current cost (40,000 * 72)

2,880,000

Question 4 answer B Inventory, December 31 at current cost

2,880,000

Inventory, December 31 at historical cost

2,520,000

Unrealized holding gain

360,000

Problem 5 Dwane Company disclosed supplemental information on the effects of changing prices. The entity computed the following increase in current cost of inventory:

Increase in current cost - nominal peso

1,500,000

Increase in current cost – constant peso

1,200,000

What amount should be disclosed as the inflation component of the increase in current cost? a. b. c. d.

2,700,000 1,500,000 1,200,000 300,000

Solution 5 answer D Inflation component (1,500,000 – 1,200,000)

300,000

The increase in current cost nominal peso is the total increase including increase caused by inflation. The increase in current cost constant peso is the total increase after eliminating the increase caused by inflation.

Theories 1.

The realized holding gain for inventory sold is equal to

a. b. c. d.

Excess of cost of goods sold at average current cost over cost of goods sold at historical cost. Excess of cost of goods sold at historical cost over cost of goods sold at average current cost. Excess of cost of goods sold at current cost over cost of goods sold at historical cost. Excess of cost of goods sold at historical cost over cost of goods sold at current cost.

Answer: a. Excess of cost of goods sold at average current cost over cost of goods sold at historical cost. 2.

The unrealized holding gain for ending inventory is equal to

a. b. c. d.

Excess of ending inventory at average current cost over ending inventory at historical cost. Excess of ending inventory at historical cost over ending inventory at average current cost. Excess of ending inventory at current cost over ending inventory at historical cost. Excess of ending inventory at historical cost over ending inventory at average current cost.

Answer: c. Excess of ending inventory at current cost over ending inventory at historical cost 3. a. b. c. d.

What is the basis of depreciation under current cost accounting? Current cost Average current cost Historical cost Carrying amount

Answer: b. Average current cost 4.

The realized holding gain for depreciable asset is equal to

a. b. c. d.

Excess of depreciation on average current cost over depreciation on historical cost. Excess of depreciation on historical cost over depreciation on average current cost. Excess of depreciation on current cost over depreciation on historical cost. Excess of depreciation on historical cost over depreciation on current cost.

Answer: a. Excess of depreciation on average current cost over depreciation on historical cost. 5. a. b. c. d.

What is the net current cost of depreciable asset? Current cost less accumulated depreciation based on current cost. Average current cost less accumulated depreciation based on average current cost. Historical cost less accumulated depreciation based on historical cost. Current cost less accumulated depreciation based on average current cost.

Answer: a. Current cost less accumulated depreciation based on current cost. 6. a. b. c. d.

The unrealized holding gain for depreciable asset is equal to Excess of net current cost of asset over the carrying amount. Excess of carrying amount of asset over the net current cost. Excess of current cost over historical cost. Excess of historical cost over current cost.

Answer: a. Excess of net current cost of asset over the carrying amount.

7.

The realized holding gain for nondepreciable asset is equal to

a. b. c. d.

Excess of current cost at year- end over historical cost. Excess of current cost at the date of sale over historical cost. Excess of historical cost over current cost at year- end. Excess of historical cost over current cost at the date of sale.

Answer: b. Excess of current cost at the date of sale over historical cost. 8.

The unrealized holding gain for nondepreciable asset is equal to

a. b. c. d.

Excess of current cost at year- end over historical cost. Excess of historical cost over current cost at year- end. Excess of average current cost at year- end over historical cost. Excess of historical cost over average current cost year- end.

Answer: a. Excess of current cost at year- end over historical cost. 9.

In current cost financial statements

a. b. c. d.

General price level gains or losses are recognized on net monetary items. Amounts are always stated in common purchasing power unit of measurement. All items in the statement of financial position are different from historical cost. Holding gains are recognized.

Answer: d. Holding gains are recognized. 10. An entity prepared financial statements on a current cost basis. How should the entity compute cost of goods sold on a current cost basis? a. b. c. d.

Number of units sold times average current cost of units during the year. Number of units sold times current cost of units at year- end. Number of units sold times current cost of units at the beginning of the year. Beginning inventory at current cost plus cost of goods purchased less ending inventory at current cost.

Answer: a. Number of units sold times average current cost of units during the year. 11. Current cost financial statements should report holding gains during the period for which of the following? a. b. c. d.

Goods sold Inventory Goods sold and inventory Neither good sold nor inventory

Answer: c. Goods sold and inventory