The directors of Hemlock Co are preparing the financial statements for the year ended 30 September 20X3. Hemlock Co is a publicly listed company.
(1) Most of Hemlock Co’s competitors value their inventory using the average cost (AVCO) basis, whereas Hemlock Co uses the first in first out (FIFO) basis. The value of Hemlock Co’s Inventory at 30 September 20X3 on the FIFO basis, is $40 million, however on the AVCO basis it would be valued at $36 million. By adopting the same method (AVCO) as its competitors, the assistant accountant says the company would improve its profit for the year ended 30 September 20X3 by $4 million. Hemlock Co’s inventory at 30 September 20X2 was reported as $30 million, however on the AVCO basis it would have been reported as $26.8 million.
(2) Hemlock Co sold a machine to Poisson SA, a French company which it agreed to invoice in €. The sale was made on 1 October 20X6 for €250,000. €155,000 was received on 1 November 20X6 and the balance is due on 1 January 20X7.
The exchange rate moved as follows:
1 October 20X6 – €0.85 to $1
1 November 20X6 – €0.84 to $1
31 December 20X6 – €0.79 to $1
(3) After correctly accounting for the information in (1) and (2), Hemlock Co has earnings of $9,160,000. It had 2,000,000 ordinary $1 shares in issue during the year to 30 September 20X3. Hemlock Co has an additional 1,000,000 shares under option at the year end. The fair value of the shares at that date is $12.00 per share and the exercise price for the options is $10.00 each.
This quiz is for logged in users only.
