**Inventory Held for Sale**

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  The entries illustrated in this case study are to address FASAB
  Statement of Federal Financial Accounting Standard Number three,
  Accounting for Inventory and Related Property. This is not an
  authoritative guidance but an illustration of inventory transactions
  using U.S. Standard General Ledger accounts. This case study does not
  include all situations.

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**[Assumptions:]{.smallcaps}**

1\) The following entries are illustrated to represent a [revolving
fund]{.smallcaps} in second year of its operation.

2\) The entity engages in retail and manufacturing activities.

[Post Closing Trial Balance from Year 1]{.underline}

1010 40,000 4201 40,000

1523 5,000

1527 10,000 4450 40,000

1750 5,000

[3310]{.underline} [60,000]{.underline}

60,000 60,000 40,000 40,000

Account 1527 has the following items:

Item A \$4,000

Item B \$2,000

Item C \$2,000

Item D [\$2,000]{.underline}

\$10,000

1\) To anticipate revenue from sale of its inventory.

*[proprietary]{.underline}*

None

*[budgetary]{.underline}*

4210 Anticipated reimbursements & other income 35,000

4450 Unapportioned authority - available 35,000

2\) To record apportionments of the anticipated reimbursements, and
prior year unobligated balance brought forward.

*[proprietary]{.underline}*

None

*[budgetary]{.underline}*

4450 Unapportioned authority - available 75,000

4590 Apportionments unavailable 35,000

4510 Apportionments 40,000

3\) To record an allotment of apportioned authority

*[proprietary]{.underline}*

None

*[budgetary]{.underline}*

4510 Apportionments 40,000

4610 Allotments - realized resources 40,000

**[The entries illustrated below show a manufacturing
activity]{.smallcaps}**

4\) To record raw material purchased for its manufacturing activity

*[proprietary]{.underline}*

1525 Inventory - Raw Materials 5,000

2110 Accounts payable 5,000

*[budgetary]{.underline}*

4610 Allotments - realized resources 5,000

4901 Expended authority - unpaid 5,000

5\) To record receipt of a customer (a govt agency) order for \$8,000
without an advance

*[proprietary]{.underline}*

None

*[budgetary]{.underline}*

4221 Unfilled customer orders - w/o advance 8,000

4210 Anticipated reimbursements & other income 8,000

4590 Apportionments - Unavailable 8,000

4610 Allotments - realized resources 8,000

(See Budgetary Accounting Guide, pg51, entry 8)

6\) To record raw materials used to produce goods

*[proprietary]{.underline}*

1526 Inventory - Work in Process 4,000

1525 Inventory - Raw Materials 4,000

*[budgetary]{.underline}*

None

7\) To record incurrence of direct labor (salary of production workers -
\$10,000) during the production of an item

*[proprietary]{.underline}*

1526 Inventory - Work in Process 10,000

2210 Accrued funded payroll and benefits 10,000

*[budgetary]{.underline}*

4610 Allotments - realized resources 10,000

4901 Expended authority - unpaid 10,000

8\) To record incurrence of other factory overhead (\$2,000) such as
factory rent, factory utilities, depreciation on production equipments
(\$500), indirect labor (\$3,000) utilized and etc.

*[proprietary]{.underline}*

6100 Operating expense/Program costs (overhead) 5,000

6710 Depreciation expense 500

1759 Accumulated depreciation 500

2110 Accounts payable 2,000

2210 Accrued funded payroll and benefits 3,000

*[budgetary]{.underline}*

4610 Allotments - realized resources 5,000

4901 Expended authority - unpaid 5,000

9\) To record overhead applied[^1], the budget rate is determined to be
\$5.00/per direct labor hour. The direct labor hour was determined to be
900 hours. 900 hours \* \$5.00 = \$4,500.

*[proprietary]{.underline}*

1526 Inventory - Work in Process 4,500

6600 Applied overhead 4,500

*[budgetary]{.underline}*

None

10\) To pay salary to the employees

*[proprietary]{.underline}*

2210 Accrued payroll and benefits 13,000

1010 Fund balance 13,000

*[budgetary]{.underline}*

4901 Expended authority - unpaid 13,000

4902 Expended authority - pd 13,000

11\) To reclassify fully completed goods which are ready to be sold

*[proprietary]{.underline}*

1527 Inventory - Finished Goods 14,500

1526 Inventory - Work in Process 14,500

*[budgetary]{.underline}*

None

12\) To record a sale (see entry #6)

*[proprietary]{.underline}*

1010 Fund balance 8,000

5100 Revenue from goods sold 8,000

6500 Cost of goods sold 8,000

1527 Inventory - Finished Goods 8,000

*[budgetary]{.underline}*

4252 Reimbursements & other income earned - collected 8,000

4221 Unfilled customer orders - w/o advance 8,000

13\) To liquidate liabilities for the purchase of raw materials and
other overhead costs

*[proprietary]{.underline}*

2110 Accounts payable 7,000

1010 Fund balance 7,000

*[budgetary]{.underline}*

4901 Expended authority - unpd 7,000

4902 Expended authority - pd 7,000

 To close overhead [underapplied]{.underline}[^2] (applied overhead is
budgeted less than the actual overhead), which is deemed immaterial-
**Refer to the closing entry section to see the actual dollar amount**

*[proprietary]{.underline}*

*6600 Applied overhead xxx*

*6500 Cost of goods sold xxx*

*6100 Operating expense/Program costs (overhead) xxx*

*6710 Depreciation expense xxx*

*\[If overhead is overapplied (applied overhead is budgeted more than
the actual), the adjustment will be credited to CGS\]*

*If the difference between the actual and applied overhead amount is
material, then the difference is prorated to WIP, finished goods and CGS
account*s.

**Assumption**: *most of the factory overhead is reported in account
6100 but if there are any other appropriate production cost accounts,
they should be reported when applicable*.

 *To close overhead accounts and prorate [underapplied]{.underline}
overhead among the three accounts:*

*1526 Inventory - Work in Process xxx*

*1527 Inventory - Finished Goods xxx*

*6500 Cost of goods sold xxx*

*6600 Applied overhead xxx*

*6100 Operating expense/Program costs (overhead) xxx*

*And any other actual overhead accounts that were used xxx*

*(The difference between the applied overhead and overhead is prorated
to WIP, finished goods and CGS)*

 *To close overhead accounts and prorate [overapplied]{.underline}
overhead among the three accounts:*

*6600 Applied overhead xxx*

*1526 Inventory - Work in Process xxx*

*1527 Inventory - Finished Goods xxx*

*6500 Cost of goods sold xxx*

*6100 Operating exp/Program costs (overhead) xxx And any other actual
overhead accounts that were used xxx*

*(The difference between the applied overhead and overhead is prorated
to WIP, finished goods and CGS)*

**[The entries illustrated below show a retail activity]{.smallcaps}**

14\) To record inventory purchased for sale under historical cost (title
was passed) \[19\].

100 units of item A @ \$60 = \$6,000

20 units of item C @ \$50 = \$1,000

*[proprietary]{.underline}*

1521 Inventory Purchased for Resale 7,000

2110 Accounts payable 7,000

*[budgetary]{.underline}*

4610 Allotments - realized resources 7,000

4901 Expended authority - unpaid 7,000

15\) To record receipt of customer order for 180 units of item A,
without an advance

*[proprietary]{.underline}*

None

*[budgetary]{.underline}*

4221 Unfilled customer orders - without advance 8,800

4210 Anticipated reimbursements & other income 8,800

4590 Apportionments - Unavailable 8,800

4610 Allotments - realized resources 8,800

16\) To record sale of 180 units of item A \[19\]. Note: Inventory is
valued under FIFO method (First in first out)

Year 1 purchased 100 units of item A @ \$40

Year 2 purchased 100 units of item A @ \$60

*[proprietary]{.underline}*

1010 Fund balance with Treasury 8,800

5100 Revenues from Goods Sold 8,800

6500 Cost of Goods Sold 8,800

1521 Inventory Purchased for Resale 8,800

*[budgetary]{.underline}*

4252 Reimbursements & other income earned-collected 8,800

4221 Unfilled customer orders - without advance 8,800

17\) To liquidate payables for goods purchased

*[proprietary]{.underline}*

2110 Accounts payable 7,000

1010 Fund balance 7,000

*[budgetary]{.underline}*

4901 Expended authority - unpd 7,000

4902 Expended authority - pd 7,000

18\) To expense abnormal cost of handling goods that were deemed
excessive. \[ 21\] For example, the cost of moving items several times
due to base closure

*[proprietary]{.underline}*

6100 Operating expense 3,000

2110 Accounts payable 3,000

*[budgetary]{.underline}*

Abnormal cost was not recorded previously as undelivered orders

4610 Allotments - realized resources 3,000

4901 Expended authority - unpaid 3,000

19\) To record inventory acquired through exchange of nonmonetary assets
\[21\]

*[proprietary]{.underline}*

1527 Inventory - Finished Goods (FMV) 1,000

7210 Loss on disposition of assets 200

1527 Inventory - Finished Goods (BV) 1,200

\[Note: The credit entry can be any surrendered nonmonetary asset\]

*[budgetary]{.underline}*

None

20\) To record receipt of a donated inventory item from the public
\[21\]

*[proprietary]{.underline}*

1527 Inventory - Finished Goods (FMV) 2,000

5600 Donated Revenue 2,000

*[budgetary]{.underline}*

None

21\) To reclassify inventory held for sale which meet managements
criteria for future sale. \[27\] *Note: Under Latest Acquisition Cost
method, the allowance accounts that are associated with inventory shall
be reclassified as well*

*[proprietary]{.underline}*

1522 Inventory held in reserve for future sale 2,500

1527 Inventory - Finished Goods 2,500

*1521 Inventory Purchased for resale xxxx*

*[budgetary]{.underline}*

None

22\) To reclassify inventory held for sale that was damaged and
unrepairable. The net realizable value of the damaged item (its salvage
value) was estimated to be \$250. \[30\] This entry would also apply to
inventory in excess and obsolete for which the net realizable value is
less than the book value.

*[proprietary]{.underline}*

1524 Inventory - excess, obsolete and unserviceable 250

7290 Other losses 200

1527 Inventory - Finished Goods 450

*1521 Inventory Purchased for Resale xxx*

*[budgetary]{.underline}*

None

22a) The item was later disposed and the entity received \$50 \[30\]

*[proprietary]{.underline}*

1010 Fund balance 50

7210 Losses on disposition of asset 200

1524 Inventory - excess, obsolete and unserviceable 250

*[budgetary]{.underline}*

4252 Reimbursements & other income earned - collected 50

4210 Anticipated reimbursements & other income 50

4590 Apportionments - Unavailable 50

4610 Allotments - realized resources 50

Some of the inventory held for sale had a minor damage that need repair

**ALLOWANCE METHOD** \[32\]

23a) To record damaged inventory items that need repairs

*[proprietary]{.underline}*

1523 Inventory held for repair 2,000

1527 Inventory - Finished Goods 2,000

*1521 Inventory Purchased for Resale xxxx*

*[budgetary]{.underline}*

None

23b) To record repair costs for item A & B are estimated to be \$500
each for the period

*[proprietary]{.underline}*

6100 Operating expense (repair) 1,000

1529 Inventory - allowance 1,000

*[budgetary]{.underline}*

None

23c) To record actual repair cost of item A which was \$200 lower than
previously estimated.

*[proprietary]{.underline}*

1529 Inventory - allowance 500

2110 Accounts payable 300

6100 Operating expense 200

The repair cost was not recorded as undelivered orders, previously

*[budgetary]{.underline}*

4610 Allotments - realized resources 300

4901 Expended authority-unpd 300

23d) To record actual repair cost of item B which was \$100 more than
previously estimated.

*[proprietary]{.underline}*

1529 Inventory - allowance 500

6100 Operating expense 100

2110 Accounts payable 600

*[budgetary]{.underline}*

The repair cost was not recorded as undelivered orders, previously

4610 Allotments - realized resources 600

4901 Expended authority - unpaid 600

24\) To reclassify items that are repaired and are ready to be sold

*[proprietary]{.underline}*

1527 Inventory - Finished Goods 2,000

*1521 Inventory Purchased for Resale xxxx*

1523 Inventory held for repair 2,000

*[budgetary]{.underline}*

None

25\) To record an entity making a transition to allowance method which
resulted in recognizing an accumulated amount of repairs that were not
previously accounted. \[34\]

*[proprietary]{.underline}*

7400 Prior period adjustment 5,000

1529 Inventory - allowance 5,000

*[budgetary]{.underline}*

None

**DIRECT METHOD** \[33\]

*[proprietary]{.underline}*

26a) To record damaged inventory items that need repairs. The repair
expenses for items C& D are estimated to be \$1,000 each

1523 Inventory held for repair 2,000

6100 Operating exp (repair) 2,000

1527 Inventory - Finished Goods 4,000

*1521 Inventory Purchased for Resale xxxx*

26b) To record actual repair cost of item C, which was \$1,200.

*[proprietary]{.underline}*

1523 Inventory held for repair 1,000

6100 Operating exp (repair) 200

2110 Accounts payable 1,200

The repair cost was not recorded previously as undelivered orders

*[budgetary]{.underline}*

4610 Allotments - realized resources 1,200

4901 Expended authority - unpd 1,200

26c) To record actual repair cost of item D, which was \$700.

*[proprietary]{.underline}*

1523 Inventory held for repair 1,000

6100 Operating exp (repair) 300

2110 Accounts payable 700

The repair cost was not recorded previously as undelivered orders

*[budgetary]{.underline}*

4610 Allotments - realized resources 700

4901 Expended authority - unpd 700

27\) To reclassify items that are repaired and are ready to be sold

*[proprietary]{.underline}*

1527 Inventory - Finished Goods 2,000

*1521 Inventory Purchased for Resale xxxx*

1523 Inventory held for repair 2,000

*[budgetary]{.underline}*

None

28\) To record an entity making a transition to direct method which
resulted in recognizing an accumulated amount of repairs that were not
previously accounted. \[34\]

*[proprietary]{.underline}*

7400 Prior period adjustment 6,000

1523 Inventory held for repair 6,000

*[budgetary]{.underline}*

None

**[A repair method dealing with trade-ins]{.smallcaps}**

Note: This is the way that Department of Defense accounts for its
repairable items dealing with trade-ins.

[[Assumptions:]{.underline}]{.smallcaps}

a\) Assume the entries illustrated below is a federal entity (a vehicle
procurer) which buys motor vehicles and sells them to other federal
entities.

b\) Assume this entity receives motor vehicles that need repairs. It
does not repair the vehicles directly but makes arrangements with a
repair facility to fix the vehicles and then sells repaired vehicles
back to a customer entity.

c\) Note that repair method dealing with trade-in illustrated below does
**not** show a complete process.

A customer entity wants to get a new motor vehicle and trade in his old
motor vehicle that needs a repair. The FMV of the old vehicle is \$3,000
and the vehicle procurer wants another \$2,000 in cash. The customer
agrees and promises to pay \$2,000 in 10 days and takes the new motor
vehicle back to his organization. On [vehicle procurers
book]{.underline}, the following entries are made:

[Note: Entries 29a, 29b, and 29c occur simultaneously]{.smallcaps}

29a) The vehicle procurer and the customer entered into an agreement and
\$2,000 will be paid by the customer

*[proprietary]{.underline}*

None

*[budgetary]{.underline}*

4221 Unfilled customer order - without advance 2,000

4210 Anticipated reimbursements and other income 2,000

4590 Apportionments - Unavailable 2,000

4610 Allotments - realized resources 2,000

29b) To record issuance of a new motor vehicle to the customer

*[proprietary]{.underline}*

6500 Cost of goods sold 3,300

1529 Inventory - allowance for holding gains/losses 700

1527 Inventory - Finished Goods 4,000

(Cost of goods sold represent the cost of the new vehicle; Upon a sale,
inventory allowance is adjusted to reduce the previously unrealized
holding gains/losses.)

*[budgetary]{.underline}*

None

29c) To record an old motor vehicle that was traded in for a new motor
vehicle. This entry is to show trade-in only and additional entry for
indirect cost is not included.

*[proprietary]{.underline}*

1310 Accounts receivable 2,000

1523 Inventory held for repair 4,000

5100 Revenue from goods sold 2,000

5790 Other financing source 3,000

1529 Inventory - allowance for estimated repair cost 1,000

(Account receivable represents the cash amount the vehicle procurer will
receive from the customer; Inventory held for repair represents the
value of an asset after it is repaired (value of a similar new asset);
Other financing source represents FMV of the old vehicle - other
financing source was used instead of revenue from goods sold due to
trade-in which is not a budgetary resource; Inventory allowance
represents the estimated repair cost of the damaged vehicle)

*[budgetary]{.underline}*

4251 Reimbursements & other income earned - receivable 2,000

4221 Unfilled customer orders - without advance 2,000

29d) To record the cash received from the customer entity in exchange
for the broken vehicle

*[proprietary]{.underline}*

1010 Fund balance with Treasury 2,000

1310 Accounts receivable 2,000

*[budgetary]{.underline}*

4252 Reimbursements & other income earned - collected 2,000

4251 Reimbursements & other income earned - receivable 2,000

29e) To record actual repair cost of \$1,000 for the damaged vehicle
recorded on entry #29c, and to set up payable to repair installation.
(*Note: In DoD the vehicle procurer absorbs both losses and gains due to
incorrect estimation*).

*[proprietary]{.underline}*

1529 Inventory - allowance for estimated repair cost 1,000

2110 Accounts payable 1,000

(Inventory - allowance amount represents the estimated repair cost from
entry #29c; Accounts payable represent the amount payable to repair
facility for fixing the old vehicle from entry #29c)

*[budgetary]{.underline}*

4610 Allotments - realized resources 1,000

4901 Expended authority - unpaid 1,000

29f) To reclassify an old vehicle from entry #21a which is now fixed and
ready to be sold

*[proprietary]{.underline}*

1527 Inventory - Finished Goods 4,000

1523 Inventory held for repair 4,000

*[budgetary]{.underline}*

None

**[Latest Acquisition Cost Method]{.smallcaps}**

This section of the Inventory held for sale shows illustration on Latest
Acquisition Cost Method (LAC) \[23\]

**[assumption]{.smallcaps}**: The entity decided to buy item Y and sell
it to other entities during the year. The item Y would be valued under
the Latest Acquisition Cost Method.

TABLE -Current Year Activity

Unrealized

[Item]{.underline} [Qty]{.underline} [Unit cost]{.underline} [Total
cost]{.underline} [gain/(loss)]{.underline}

**HC HC** HC = Historical Cost

2/14 Y 20 30 600

6/25 Y 30 40 1,200

11/3 Y [30]{.underline} [50]{.underline} [1,500]{.underline}

12/31 80 @ 50 3,300 4,000 700

30a) To record goods purchased on 2/14

*[proprietary]{.underline}*

1521 Inventory Purchased for Resale 600

2110 Accounts payable 600

*[budgetary]{.underline}*

4610 Allotments - realized resources 600

4901 Expended authority - unpaid 600

30b) To record goods purchased on 6/25

*[proprietary]{.underline}*

1521 Inventory Purchased for Resale 1,200

2110 Accounts payable 1,200

*[budgetary]{.underline}*

4610 Allotments - realized resources 1,200

4901 Expended authority - unpaid 1,200

30c) To record goods purchased on 11/3

*[proprietary]{.underline}*

1521 Inventory Purchased for Resale 1,500

2110 Accounts payable 1,500

*[budgetary]{.underline}*

4610 Allotments - realized resources 1,500

4901 Expended authority - unpaid 1,500

30d) The order was received on 11/20 without an advance

*[proprietary]{.underline}*

None

*[budgetary]{.underline}*

4221 Unfilled customer orders - without advance 2,400

4210 Anticipated reimbursements & other income 2,400

4590 Apportionments - Unavailable 2,400

4610 Allotments - realized resources 2,400

30e) To record sale of inventory on 12/5 (40@ \$60)

*[proprietary]{.underline}*

1010 Fund balance 2,400

5100 Revenue from goods sold 2,400

*[budgetary]{.underline}*

4252 Reimbursements & other income earned-collected 2,400

4221 Unfilled customer orders - without advance 2,400

30f) To revalue inventory at the end of the period[^3] using latest
acquisition method \[23\]

*[proprietary]{.underline}*

1521 Inventory Purchased for Resale 350

1529 Inventory - allowance 350

(To revalue inventory at latest acquisition method \$50\*80 =
\$4,000-\$3300 (actual cost) = 700\*40/80 = 350)

*[budgetary]{.underline}*

None

30g) To record cost of goods sold for the period \[25\]

*[proprietary]{.underline}*

6500 Cost of goods sold 1,650

1521 Inventory Purchased for Resale 1,650

*[budgetary]{.underline}*

None

***Cost of goods sold calculations:***

Beginning Inventory at LAC 0

Less: beginning allowance for unrealized holding gains 0

[Plus: actual purchases]{.underline} [3,300]{.underline}

Cost of goods available for sale 3,300

Less: ending inventory at end of the period LAC

\$50\*\[80-40(#sold)\] = 2,000 2,000

Plus: Ending allowance for unrealized holding gains [350]{.underline}

[1,650]{.underline}

Cost of Goods Sold 1,650

**[Adjusting entries]{.smallcaps}**:

*[Budgetary]{.underline}*

4590 Apportionments - Unavailable 13,750

4210 Anticipated reimbursements and Other income 13,750

**[Closing entries]{.smallcaps}**:

*[Proprietary]{.underline}*

 To close overhead [underapplied]{.underline} from manufacturing
activity, which is deemed immaterial.

6600 Applied overhead 4,500

6500 Cost of goods sold 1,000

6100 Operating expense/Program costs (overhead) 5,000

6710 Depreciation expense 500

\[If overhead is overapplied (applied overhead is budgeted more than the
actual), the adjustment will be credited to CGS\]

 To close all revenue and expense accounts

5100 Revenue from goods sold 21,200

5600 Donated revenue 2,000

5790 Other financing sources 3,000

3310 Cumulative results of operations 26,200

3310 Cumulative results of operations 40,150

6100 Operating expenses 5,800

6500 Cost of goods sold 22,750

7210 Losses on disposition of assets 400

7290 Other losses 200

7400 Prior period adjustments 11,000

*[Budgetary]{.underline}*

 To close budgetary accounts

4902 Expended authority - unpd 27,000

4201 Total actual resources - collected 5,750

4252 Reimbursements and other income earned - coll 21,250

4610 Allotments - realized resources 24,150

4450 Unapportioned authority - available 24,150

[^1]: ^?^ Overhead is applied to products because of managements
    desire for a close approximation of costs of different products. If
    such product costs are to help management for product pricing,
    income determination, and inventory valuation, they must be timely
    as well as accurate. If the purpose were to apply all actual
    overhead to actual production for the year, the most accurate
    application of overhead could be made only at the end of the year,
    after actual results were determined. However, this timing would be
    too late. Managers want product cost information throughout the
    year. Therefore overhead application rates are usually computed in
    advance of production. (Charles T Horngren, George Foster, [Cost
    Accounting A Managerial Emphasis]{.underline}, 6th edition pg 98).

[^2]: ^?^ If the under applied or over applied amount is immaterial, the
    difference in the applied and the actual amount is adjusted to CGS.
    But if the under applied or over applied amount is material then the
    difference is prorated to the WIP, finished goods, and CGS. (Charles
    T Horngren, George Foster, [Cost Accounting A Managerial
    Emphasis]{.underline}, 6th edition pgs103-104).

[^3]: ^?^ Period - refers to an accounting period which is a span of
    time covered by an income statement; period can be on monthly,
    quarterly or annual basis.