Trading Stock and the Accrual Rules at Year End
Tane runs a building-supplies business as a sole trader, registered for GST on the invoice basis. At 31 March his closing stock at cost is $140,000, but some timber has been water-damaged and its net realisable value is $95,000. He sold goods on 20 March for $30,000 plus GST and invoiced the customer, but payment arrives on 15 April. He also received a $12,000 deposit in March for goods delivered in May. Tane uses the accrual rules for his debtors and has a $200,000 loan from a related party with interest at 6% paid monthly. He is unsure whether he can deduct the damaged stock and when the March sale and the deposit are income.
1. Determine the value of closing stock and explain the treatment of the damaged timber.
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Closing stock is valued at the lower of cost and net realisable value, applied on an item-by-item or reasonable group basis. The timber's cost is part of the $140,000, but its net realisable value is lower, so it must be written down. If the damaged timber's cost is, say, $50,000 and its NRV is $5,000, the write-down is $45,000, reducing closing stock. The correct approach is to compare cost and NRV for each class of stock and use the lower figure, not to deduct the whole $45,000 as a general expense if that would double-count. Tane should keep records of the damage, the valuation method, and the NRV calculation to support the write-down. The resulting closing stock is $95,000 only if that figure reflects the lower of cost and NRV across all stock; otherwise the total must be recalculated item by item.
2. Explain when the March sale and the May deposit are recognised as income under the accrual rules.
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Because Tane accounts for GST on the invoice basis and uses accrual accounting, the $30,000 sale is recognised when he issued the invoice in March, not when payment arrives in April. The GST-exclusive amount of $30,000 is income; the GST collected is not income. The $12,000 deposit is more difficult. A deposit received before delivery may be income in advance or a liability, depending on whether the goods are identified and the contract is unconditional. If the deposit is non-refundable and the sale is unconditional, it may be recognised as income when received or accrued; if it is refundable or conditional, it is a liability until delivery. Tane should apply the accrual rules consistently and consider whether the deposit is a 'financial arrangement' or an amount in advance. The safest treatment is to recognise income when the obligation to supply is performed, unless the contract makes the deposit non-refundable and unconditional.