Chapter 20 : Current Cost Accounting

Summary Notes and example questions : Valix

Definition: Current cost accounting is a method of measuring assets, liabilities, income and expenses
at current cost at the end of reporting period .

In other words , current cost accounting is the restatement of historical cost in terms of current
replacement cost.

Current replacement cost is the estimated cost to acquire a similar asset at current purchase price.

The essence of current cost accounting :Is the recognition of a holding gain or holding loss.

Note: if the replacement cost is higher than historical cost , the difference is holding gain. If the
replacement cost is lower than historical cost , the difference is holding loss.

Holding gain or holding loss may be classified as realized or unrealized.

if the asset is still an sold or unused , the holding gain or loss is said to be unrealized.

If the assets is already sold or used during the year , the holding gain or loss is to be realized.

🍎 PREPARATION OF CURRENT COST INCOME STATEMENT

✍SALES- sales are made at current selling prices throughout the period and therefore not restated.

✍COST OF SALES - cost of sale equals the current cost of the units sold at the time of sale.

in practice cost of sales is equal to the average unit cost multiplied by the units sold during the period.

✍ OPERATING EXPENSES- these are measured at current cost when incurred . Accordingly these
expenses are already stated on a current cost basis .

✍ DEPRECIATION- depreciation is based on average current cost of the property plant and equipment.

✍ INXOME TAX- INCOME TAX IS ALREADY ON CURRENT COST BASIS . However the income tax is
computed on the basis of income under historical cost.

✍ REALIZED HOLDONG GAIN OR LOSS- is the difference between the current cost and historical cost of
assets sold or used during the year .

🍎 FORMULAS

For INVENTORY SOLD. 🍎 DEPRECIABLE PROPERTY

Cost of sales: AVERAGE CURRENT COST : X. DEPN' based on AVERAGE CURRENT COST:X

Less: COS: HISTORICAL COST : ( X ). Less: DEPN' based on Historical Cost ( X)

realized holding gain ( loss). realized holding gain (loss)

🍎NON DEPRECIABLE PROPERTY ( LAND)

CURRENT COST at the time of sale: X

Less: Historical Cost : (X)

Realized holding gain or loss

🍎Note: unrealized holding gain or loss is the difference between the current cost and historical cost of
the assets still on hand or and sold at the year.

🍎For ENDING INVENTORY SOLD

CURRENT COST AT END OF THE YEAR : X

Less: HISTORICAL COST : ( X )

realized holding gain ( loss)

🍎 DEPRECIABLE PROPERTY. 🍎NON DEPRECIABLE PROPERTY ( LAND)

CURRENT COST LESS ACC- DEPN':X. CURRENT COST at the time of YEAR: X

Less: CARRYING AMOUNT( X). Less: Historical Cost : (X)

realized holding gain (loss). Realized holding gain or loss

� CURRENT COST: STATEMENT OF FINANCIAL POSITION

✍ Cash and receivables - these items are already reported on the current cost basis therefore NOT
RESTATED.

✍ Inventory - Inventory is stated at current cost at the end of reporting period.

✍ PPE - Land is stated at current cost at the end of reporting period.

depression ball property , plant and equipment are shown at the current cost minus accumulated
depreciation based on current cost at year-end.

✍ Payables - payables are conventionally reported on a current basis and therefore do not require
restatement.

✍ Share Capital and share Premium- these items are not : Current cost RESTATED.

✍ Retained - Dec Earnings - the balance of retained earnings is obtained from the current cost
statement of retained earnings.

Formula :

current cost RE - Jan 1: X

Add current cost NET INCOME : X

Less: Dividends Declared /paid: (X)

Current Cost RE- Dec 31

� ILLUSTRATION
Practical Acctg Practice Solving and Solutions

1. Transactions regarding the land of simple company are summarized below:

 The entity purchased land on january 1 2010 for 500,000 cash . On december 31 2010, the land
has a current replacement cost of 600000 .
 on december 31 2011 , the land has a current replacement cost of 750,000 pesos .
 the entity sold the land for 1 million pesos cash on december 31 2012 . On this date , the current
replacement cost of the land is 800,000 pesos .
A. what is the unrealized holding gain to be reported in the 2010 income statement?
B. what is the unrealized holding gain to be reported in 2010 income statement?
C. What is the realized holding gain to be reported in 2012 income statement?
D. what is the gain on sale of land to be reported in 2012 under current cost accounting?
Answers :
A. Current cost on december 31 2010 = 600,000 less the historical cost of 500,000 = unrealize
holding gain in 2010 of 100,000.
Theory behind: for non depreciable asset or land , unrealized holding gain or loss is the
difference between a current cost and historical cost of the asset and sold at the end of the year.
B. Current cost december 31 2011 = 750,000 less historical cost of 500,000 equals cumulative
unrealized holding gain in 2011 of 250,000 pesos less unrealized holding gain recognized in
2010 of 100,000 pesos = unrealized gain to be reported in 2011 of 150,000 pesos.
C. Current cost december 31 2012 is 800,000 less the historical cost of 500,000 = realized holding
gain in 2012 of 300,000 less unrealized holding gain reported in 2010 and 2011 of 250,000 we
have realize holding game to be reported in 2012 of 50,000 pesos.
Theory behind: for non depreciable asset , realize holding gain or loss is the difference between
the current cost at the time of sale and the historical cost of the asset sold .
D. Sales price of 1 millionless cutting cost december 31 22 of 800,000 equals we have gain on
sale of 200,000.
2. Easy company acquired an equipment on january 1 2010 for 5000000 .depreciation is
computed using straight line method . The estimated useful life of the equipment is 5 years with
no residual value.
A specific price index applicable to the equipment was 150 on january 1 2010 and 225 and
december 31 2010.
A. what is the amount of depreciation that should be reported in the current cost income
statement for 2010?
B. what is the realized holding gain on the equipment to be reported in 2010?
C. what is the unrealized holding gain on the equipment to be reported in 2010?
Answers :
A. Current cost of 5M x 225/150= 7.5 M
Average Current Cost ( 5M + 7.5/2)= 6.250
Depreciation on Average current cost ( 6. 250/5 ) = 1,250,000.
Under current cost accounting , depreciation is based on average current cost.
B. Depreciation on average current cost ( 6.250 /5 ) = 1,250,000
Depreciation on historical cost ( 5m/5) = 1,000,000
 Realize holding gain= 250,000
C. Current cost = 7.5M
Less:Accumulated depreciation ( 7.5/5 ) 1.5
Net current cost = 6 million
Historical cost = 5 million
Accumulated depreciation using straight line method: 1M
Carrying amount = 4 million

Net current cost 6M

Less' CA: 4M
Unrealized holding gain : 2M

3. Kerr company purchased a machine for 1,150,000 on january 1 2010 . At the end of the year , the
current cost of the machine was 1,250,000. The machine has no residual value and has five years life and
depreciated using a straight line method.

A. what is the amount of depreciation that should be reported in the current cost income statement
for 2010?

B. what is the realized holding gain on the equipment to be reported in the current cost income
statement for 2010?

C. What is the unrealized holding gain on the equipment to be reported in IS 2010?

Answers

A. Historical cost : Jan 1= 1150,000

Add: current cost : Dec 31= 1250,000

Total: 2.4/ 2= average current cost Dprn=1.2M

1.2M/ 5= 240,000

B. Current cost= 1,250,000

Less: ACC Depn ( 1.250/5) = 250K

Net current cost: 1M

Historical cost: 1,150,000

Less: ACC Depn: 230,00

CA: 920,000
Net CC less CA= 1M- 920K= 80K unrealized HG

4. Information with respect to cost of good sold of Bar Company for 2010 is as follows:

Historical cost. Units

Inventory ,Jan 1 1,060,000. 20,000

Purcahses :. 5,580,000. 90,000

Good available 4 sale:. 6,640,000. 110,000

Inventory,End Dec. ( 2,520,000). ( 40,000)

Cost of Goods sold :. 4,120,000. 70,000

Bar estimated that the current per unit of inventory was 58 on January 2010 and 72 on December
31,2010.

A. What is the COGS for 2010 IS restated to current cost Acctg. ?

B. What should be reported as realized holding gain from inventory sold for 2010 IS CCA?

C. What should be reported as inventory on Dec 2010 under CCA?

D. What should be reported as unrealized holding gain on Inventory on Dec 2010 under CCA?

Answers

A. Current cost per unit- Jan 1= 58

Current cost per unit - Dec 31= 72

Total: 130/2=. Ave. CC: 65

COGS @ Ave. CC = 70kx65= 4,550,000

B. COGS @ Ave. CC = 70kx65= 4,550,000

COGS at Historical Cost = 4,120,000

Realized holding gain : 430,000

C. Inventory, December 31 at CCA ( 40Kx 72) 2,880,000

D. Inventory, December 31 at CCA ( 40Kx 72) 2,880,000

Inventory , Dec 31 at Historical Cost :. 2,520,000

Unrealized Holding gain: 360,000

5. The ff. Information pertains to each unit of merchandise purchased for resale by Vanessa Company :

March 1 2010:

Purachse price 8, selling price 12, price level index 110

December 31,2010:

Replacement cost 10, Selling price 15,Price level index 121

under current cost accounting what is the amount of holding gain on each unit of this merchandise?

Answer:

Replacement cost 10

Historical Cost 8

Holding gain: 2