August 11, 1998 (Revised)

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Inventory Held for Sale

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. 

ASSUMPTIONS:

1) The following entries are illustrated to represent a REVOLVING FUND in second year of its

operation.

2) The entity engages in retail and manufacturing activities.

Post Closing Trial Balance from Year 1

1010 40,000 4201 40,000

1523 5,000

1527 10,000 4450 40,000

1750 5,000

3310 60,000 

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

$10,000

1) To anticipate revenue from sale of its inventory.

proprietary

None

budgetary

4210 Anticipated reimbursements & other income 35,000

4450 Unapportioned authority - available 35,000
August 11, 1998 (Revised)

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2) To record apportionments of the anticipated reimbursements, and prior year unobligated

balance brought forward.

proprietary

None

budgetary

4450 Unapportioned authority - available 75,000

4590 Apportionments unavailable 35,000 

4510 Apportionments 40,000

3) To record an allotment of apportioned authority

proprietary

None

budgetary

4510 Apportionments 40,000

4610 Allotments - realized resources 40,000

THE ENTRIES ILLUSTRATED BELOW SHOW A MANUFACTURING ACTIVITY

4) To record raw material purchased for its manufacturing activity

proprietary

1525 Inventory - Raw Materials 5,000

2110 Accounts payable 5,000

budgetary

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

None

budgetary

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

4210 Anticipated reimbursements & other income 8,000
August 11, 1998 (Revised)

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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

1526 Inventory - Work in Process 4,000

1525 Inventory - Raw Materials 4,000

budgetary

None

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

production of an item

proprietary

1526 Inventory - Work in Process 10,000

2210 Accrued funded payroll and benefits 10,000

budgetary

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

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

4610 Allotments - realized resources 5,000

4901 Expended authority - unpaid 5,000
August 11, 1998 (Revised)

 “Overhead is applied to products because of management’s desire for a close 1

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, 6th edition pg 98). 

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9) To record overhead applied , the budget rate is determined to be $5.00/per direct labor hour. 1

The direct labor hour was determined to be 900 hours. 900 hours * $5.00 = $4,500. 

proprietary

1526 Inventory - Work in Process 4,500

6600 Applied overhead 4,500

budgetary

None

10) To pay salary to the employees

proprietary

2210 Accrued payroll and benefits 13,000

1010 Fund balance 13,000

budgetary

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

1527 Inventory - Finished Goods 14,500

1526 Inventory - Work in Process 14,500

budgetary

None
August 11, 1998 (Revised)

 If the under applied or over applied amount is immaterial, the difference in the applied 2

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, 6th edition pgs103-104). 

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

proprietary

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

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

2110 Accounts payable 7,000

1010 Fund balance 7,000

budgetary

4901 Expended authority - unpd 7,000

4902 Expended authority - pd 7,000

To close overhead underapplied (applied overhead is budgeted less than the actual 2

overhead), which is deemed immaterial- Refer to the closing entry section to see the 

actual dollar amount

proprietary

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]
August 11, 1998 (Revised)

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If the difference between the actual and applied overhead amount is material, then the difference

is prorated to WIP, finished goods and CGS accounts. 

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 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 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)
August 11, 1998 (Revised)

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THE ENTRIES ILLUSTRATED BELOW SHOW A RETAIL ACTIVITY

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

1521 Inventory Purchased for Resale 7,000

2110 Accounts payable 7,000

budgetary

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

None

budgetary

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

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

4252 Reimbursements & other income earned-collected 8,800

4221 Unfilled customer orders - without advance 8,800
August 11, 1998 (Revised)

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17) To liquidate payables for goods purchased

proprietary

2110 Accounts payable 7,000

1010 Fund balance 7,000

budgetary

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

6100 Operating expense 3,000

2110 Accounts payable 3,000

budgetary

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

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

None

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

proprietary

1527 Inventory - Finished Goods (FMV) 2,000

5600 Donated Revenue 2,000

budgetary

None
August 11, 1998 (Revised)

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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

1522 Inventory held in reserve for future sale 2,500

1527 Inventory - Finished Goods 2,500

1521 Inventory Purchased for resale xxxx

budgetary

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

1524 Inventory - excess, obsolete and unserviceable 250

7290 Other losses 200

1527 Inventory - Finished Goods 450

1521 Inventory Purchased for Resale xxx

budgetary

None

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

proprietary

1010 Fund balance 50

7210 Losses on disposition of asset 200

1524 Inventory - excess, obsolete and unserviceable 250

budgetary

4252 Reimbursements & other income earned - collected 50

4210 Anticipated reimbursements & other income 50

4590 Apportionments - Unavailable 50

4610 Allotments - realized resources 50
August 11, 1998 (Revised)

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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

1523 Inventory held for repair 2,000

1527 Inventory - Finished Goods 2,000

1521 Inventory Purchased for Resale xxxx

budgetary

None

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

proprietary

6100 Operating expense (repair) 1,000

1529 Inventory - allowance 1,000

budgetary

None

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

estimated. 

proprietary

1529 Inventory - allowance 500

2110 Accounts payable 300

6100 Operating expense 200

The repair cost was not recorded as undelivered orders, previously

budgetary

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

1529 Inventory - allowance 500

6100 Operating expense 100

2110 Accounts payable 600
August 11, 1998 (Revised)

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budgetary

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

1527 Inventory - Finished Goods 2,000

1521 Inventory Purchased for Resale xxxx

1523 Inventory held for repair 2,000

budgetary

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

7400 Prior period adjustment 5,000

1529 Inventory - allowance 5,000

budgetary

None

DIRECT METHOD [¶33]

proprietary

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

1523 Inventory held for repair 1,000
August 11, 1998 (Revised)

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6100 Operating exp (repair) 200

2110 Accounts payable 1,200

The repair cost was not recorded previously as undelivered orders

budgetary

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

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

4610 Allotments - realized resources 700

4901 Expended authority - unpd 700

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

proprietary

1527 Inventory - Finished Goods 2,000

1521 Inventory Purchased for Resale xxxx

1523 Inventory held for repair 2,000

budgetary

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

7400 Prior period adjustment 6,000

1523 Inventory held for repair 6,000

budgetary

None
August 11, 1998 (Revised)

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A REPAIR METHOD DEALING WITH TRADE-INS

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

trade-ins.

ASSUMPTIONS:

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, the following entries are made:

NOTE: ENTRIES 29A, 29B, AND 29C OCCUR SIMULTANEOUSLY

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

paid by the customer

proprietary

None

budgetary

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

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
August 11, 1998 (Revised)

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allowance is adjusted to reduce the previously unrealized holding gains/losses.)

budgetary

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

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

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

1010 Fund balance with Treasury 2,000

1310 Accounts receivable 2,000

budgetary

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

1529 Inventory - allowance for estimated repair cost 1,000

2110 Accounts payable 1,000
August 11, 1998 (Revised)

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(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

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

1527 Inventory - Finished Goods 4,000

1523 Inventory held for repair 4,000

budgetary

None

LATEST ACQUISITION COST METHOD

This section of the Inventory held for sale shows illustration on Latest Acquisition Cost Method

(LAC) [¶23]

ASSUMPTION: 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.
August 11, 1998 (Revised)

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TABLE -Current Year Activity

Unrealized

Item Qty Unit cost Total cost gain/(loss)

HC HC HC = Historical Cost

2/14 Y 20 30 600

6/25 Y 30 40 1,200 

11/3 Y 30 50 1,500 

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

30a) To record goods purchased on 2/14

proprietary

1521 Inventory Purchased for Resale 600

2110 Accounts payable 600

budgetary

4610 Allotments - realized resources 600

4901 Expended authority - unpaid 600

30b) To record goods purchased on 6/25

proprietary

1521 Inventory Purchased for Resale 1,200

2110 Accounts payable 1,200

budgetary

4610 Allotments - realized resources 1,200

4901 Expended authority - unpaid 1,200

30c) To record goods purchased on 11/3 

proprietary

1521 Inventory Purchased for Resale 1,500

2110 Accounts payable 1,500

budgetary

4610 Allotments - realized resources 1,500

4901 Expended authority - unpaid 1,500

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

proprietary

None
August 11, 1998 (Revised)

 Period - refers to an accounting period which is a span of time covered by an income 3

statement; period can be on monthly, quarterly or annual basis.

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budgetary

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

1010 Fund balance 2,400

5100 Revenue from goods sold 2,400

budgetary

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 using latest acquisition method [¶23] 3

proprietary

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

None

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

proprietary

6500 Cost of goods sold 1,650

1521 Inventory Purchased for Resale 1,650

budgetary

None
August 11, 1998 (Revised)

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Cost of goods sold calculations:

Beginning Inventory at LAC 0

Less: beginning allowance for unrealized holding gains 0

Plus: actual purchases 3,300

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

 1,650

Cost of Goods Sold 1,650

ADJUSTING ENTRIES:

Budgetary

4590 Apportionments - Unavailable 13,750

4210 Anticipated reimbursements and Other income 13,750
August 11, 1998 (Revised)

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CLOSING ENTRIES:

Proprietary

To close overhead underapplied 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

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
August 11, 1998 (Revised)

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