Question 1 The following events occurred during the first month of operations for XYZ Corp, a company specialised in providing software to motorcycle manufacturers.

Jan. 1 The shareholders invested £300,000 in cash, a land worth £100,000 and a building worth £250,000 in exchange for common shares.

Jan. 2 In order to develop a research facility, XYZ acquired computer equipment for £175,000. The purchase price was paid 20% in cash and the remaining on a note. Jan. 4 XYZ issued an advertisement in the newspaper in order to recruit a research lab specialist.

The ad will run throughout the month and will cost £1,500. The invoice was received on the 15th of the month. Jan. 31 The research specialist worked for the last 2 weeks of the month. The salary of £5,500 was paid on the last day of the month. Jan. 31 The

company started shipping products during the last week of the month. During that period, sales amounted to £265,000, all received in cash except for £15,000, which was sold on account. Jan. 31 At the end of the month, XYZ received a bill from My Telecomm Ltd.

for its telephone, Internet and cell phone charges. The total of the invoice amount to £750 to be paid by the end of the following month. In addition, the company paid the newspaper company for the advertisement services provided. Jan. 31 To ensure the survival

of the company in case of an incident, the company prepaid £5,000 for an annual insurance policy with coverage starting at the beginning of the following month. Jan. 31 Given the success of the company, the board of directors declared and paid a dividend of

£15,000. To answer this question: Prepare the journal entries for the current month. Do not prepare any entries for transactions that relate to the following month.

Question 2

The table below shows a summary of the transactions during the 2014 fiscal year of ABC Ltd. The company is specialised in one computer hardware product, namely, XYZ. After performing an inventory count at the end of the year, ABC Ltd. has determined that only 24,500 units were left on hand. The market value per unit at year end has also been established to be £5.80/unit.

Transaction

Quantity

Purchase Price

Per Unit

Beginning inventory

8,000

£5.15

Purchases – February 2

6,500

£5.25

Purchases – April 1

21,000

£5.30

Purchases – July 1

42,500

£5.85

Purchases – October 31

6,500

£6.25

To answer this question:

Calculate ending inventory and cost of goods sold under the weighted average method.

Calculate ending inventory and cost of goods sold under the FIFO method.

Which of the two methods is preferred for income tax purposes? Why?

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