Part 1 National Company produces a single product called Delta. The production cycle takes on average three months to complete. The Companys normal capacity per cycle is 100,000 units. The monthly total manufacturing fixed overhead costs is AED 120,000. These fixed costs are allocated to the units produced each cycle based on the number of units produced. The Company produced 80,000 units in the first cycle of 2017 and sold 70,000 units by the end of April 2017. Thus, the number of units in the ending inventory of finished goods was 10,000 units. There were no ending inventories of raw materials or work-in-process. The following costs were incurred in the first cycle of the year in relation to the production of the 100,000 units (all amounts are in dirhams):

Cost Item Amount

Purchase price of the raw material used during the cycle 150,000

Transportation and handling costs of used material in the cycle 35,000

Cost of direct labor 300,000 Allocated variable overhead costs 60,000

Storage costs related to finished products before sale 10,000

Cost of wasted material during production 10,000

The nature of the manufacturing process causes a normal waste of 5% of the materials used in the cycle. The sale price of a unit sold was 8 dirham. The Company follows the rules of IFRS for the purposes of preparing its financial statements.

Required:

(a) Analyze the above cost items and determine the amount of the ending inventory of finished goods that would be considered for the balance sheet at May 31, 2017.

(b) Construct the necessary journal entries to record the above transactions and events assuming the Company uses the perpetual inventory system (5 marks)

Part 2 Valley Company purchased specialized equipment for 15 million dirhams on December 27, 2015. The Company borrowed on the same day 5 million dirhams for 10 years at 8% annual interest rate to partially finance the acquisition of the equipment. The interest is to be paid annually in January of each year while the principle amount will be paid on Dec. 31, 2025. The following additional costs were incurred in the process on Dec. 31, 2015: Equipment registration and installation costs 300,000 The Company also signed a maintenance contract for 5 years for an amount of 100,000 dirham annually. Estimated useful life of the equipment is 15 years with a net cost at the end of the useful life of 1,000,000 dirhams (difference between salvage value and removal costs). The Company uses the straight-line method of depreciation for the equipment. The discount rate is 10%. On January 1, 2016 the equipment was ready for use in the Companys operations.

Required: 1. Analyze the above case and determine the proper cost of the equipment as of January 1, 2016 (4 marks).

2. Construct the necessary journal entries to recognize the above transactions for 2015 and 2016 (including depreciation). (4 marks)