Chapter 5, Problem 18BP

a. 1

To determine

Compute the cost of goods sold, ending inventory, and the income tax expense under FIFO cost flow method.

Answer to Problem 18BP

Compute the cost of goods sold under FIFO cost flow method as follows:

FIFO	Units	Unit Cost	Cost of Goods Sold
Beginning Inventory	200	$120	$24,000
First Purchase	130	124	16,120
Second Purchase	20	128	2,560
Total	350		$42,680

Table (1)

Compute the ending inventory under FIFO cost flow method as follows:

FIFO	Units	Unit Cost	Ending Inventory
Second Purchase	200 Table (4)	$128	$25,600

Table (2)

Compute the income tax expense under FIFO cost flow method as follows:

Computation of Income Tax Expense and Net Income
Particulars	FIFO
Sales (1)	$112,000
Less: Cost of Goods Sold	42,680
Gross Margin	69,320
Less: Operating Expense	24,000
Income Before Tax	45,320
Less: Income Tax (2)	18,128
Net Income	$27,192

Table (3)

Explanation of Solution

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items that are sold first. The value of the ending inventory consists of the recent purchased items.

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products that has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Ending Inventory: It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

Working notes:

Calculate total purchase amount:

Inventory Purchases
Particulars	Units	Unit Cost	Total cost
Beginning Inventory	200	$120	$24,000
First Purchase	130	124	16,120
Second Purchase	220	128	28,160
Goods available for sale	550		$68,280
Less: Cost of goods sold	350
Ending inventory	200

Table (4)

Calculate sales amount:

$\begin{array}{c}\text{Sales}=35\text{0 Units}\times \text{\$320}\\ =\text{\$112,000}\end{array}$ (1)

Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expenses}=4\text{0\% of income before tax}\\ =\text{\$45,320}\times \frac{40}{100}\\ =\$18,128\end{array}$ (2)

a. 2

To determine

Compute the cost of goods sold and the ending inventory under LIFO cost flow method.

Answer to Problem 18BP

Compute the cost of goods sold under LIFO cost flow method as follows:

LIFO	Units	Unit Cost	Cost of Goods Sold
Second Purchase	220	$128	$28,160
First Purchase	130	124	16,120
Total	350		$44,280

Table (5)

Compute the ending inventory under LIFO cost flow method as follows:

LIFO	Units	Unit Cost	Ending Inventory
Second Purchase	200 Table (4)	$120	$24,000

Table (6)

Compute the income tax expense under LIFO cost flow method as follows:

Computation of Income Tax Expense and Net Income
Particulars	FIFO
Sales (1)	$112,000
Less: Cost of Goods Sold	44,280
Gross Margin	67,720
Less: Operating Expense	24,000
Income Before Tax	43,720
Less: Income Tax (3)	17,488
Net Income	$26,232

Table (7)

Explanation of Solution

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items that are sold first. The value of the closing stock consists of the initial purchased items.

Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expenses}=4\text{0\% of income before tax}\\ =\text{\$43,720}\times \frac{40}{100}\\ =\$17,488\end{array}$ (3)

a. 3

To determine

Compute the cost of goods sold and the ending inventory under weighted average cost flow method.

Answer to Problem 18BP

Compute the cost of goods sold and the ending inventory under weighted average cost flow method as follows:

Weighted average	Units	Unit Cost	Total cost
Cost of goods sold	350	$124.145 (4)	$43,451
Ending inventory	200	$124.145 (4)	24,829

Table (8)

Compute the income tax expense under weighted average cost flow method as follows:

Computation of Income Tax Expense and Net Income
Particulars	FIFO
Sales (1)	$112,000
Less: Cost of Goods Sold	43,451
Gross Margin	68,549
Less: Operating Expense	24,000
Income Before Tax	44,549
Less: Income Tax (5)	17,820
Net Income	$26,729

Table (9)

Explanation of Solution

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Determine average unit cost:

$\begin{array}{c}\text{Average Unit cost}=\frac{\text{Goods avaivable for sale}}{\text{Total Units}}\\ =\frac{\text{\$68,280 Table}\left(4\right)}{550}\\ =\text{\$124}\text{.145}\end{array}$ (4)

Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expenses}=4\text{0\% of income before tax}\\ =\text{\$44,549}\times \frac{40}{100}\\ =\$17,820\end{array}$ (5)

b. 1

To determine

Record the given transactions in general journal form and post them to T-accounts under FIFO cost flow method.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system of Accounting.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.

Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Ledger:

Ledger is the book, where the debit and credit entries recorded in the journal book are transferred to their relevant accounts. The entire accounts of the company are collectively called the ledger.

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items that are sold first. The value of the ending inventory consists of the recent purchased items.

Record the given transactions in general journal form under FIFO cost flow method as follows:

Journal
Date			Account Title and Explanation	Post	Debit	Credit
				Ref.	($)	($)
2016	1.		Merchandise Inventory		16,120
			Cash			16,120
			(To record the purchase of inventory)
2016	2.		Merchandise Inventory		28,160
			Cash			28,160
			(To record the purchase of inventory)
2016	3.		Cash (1)		112,000
			Sales Revenue			112,000
			(To record the sales revenue)
2016			Cost of Goods Sold (Table (1))		42,680
			Merchandise Inventory			42,680
			(To record the cost of goods sold)
2016	4.		Operating Expense		24,000
			Cash			24,000
			(To record the operating expenses incurred)
2016		5.	Income Tax Expense (2)		18,128
			Cash			18,128
			(To record the income tax expenses incurred)

Table (10)

Post the given transactions to T-accounts using FIFO as follows:

Cash
Bal	36,000
2016	112,000	1.	16,120
		2.	28,160
		4.	24,000
		5.	18,128
Bal.	61,592

Sales revenue
		3.	112,000
		Bal.	112,000

Merchandise Inventory
Bal	24,000
1.	16,120
2.	28,160	3.	42,680
Bal.	25,600

Cost of goods sold
3.	42,680
Bal.	42,680

Common stock
		Bal	25,000
		Bal.	25,000

Retained earnings
		Bal	35,000
		Bal.	35,000

Operating expenses
4.		24,000
Bal.		24,000
Income tax expenses
5.	18,128
Bal.	18,128

b. 2

To determine

Record the given transactions in general journal form and post them to T-accounts under LIFO cost flow method.

Explanation of Solution

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items that are sold first. The value of the closing stock consists of the initial purchased items.

Record the given transactions in general journal form under LIFO cost flow method as follows:

Journal
Date			Account Title and Explanation	Post	Debit	Credit
				Ref.	($)	($)
2016	1.		Merchandise Inventory		16,120
			Cash			16,120
			(To record the purchase of inventory)
2016	2.		Merchandise Inventory		28,160
			Cash			28,160
			(To record the purchase of inventory)
2016	3.		Cash (1)		112,000
			Sales Revenue			112,000
			(To record the sales revenue)
2016			Cost of Goods Sold (Table (5))		44,280
			Merchandise Inventory			44,280
			(To record the cost of goods sold)
2016	4.		Operating Expense		24,000
			Cash			24,000
			(To record the Operating expenses incurred)
2016		5.	Income Tax Expense (3)		17,488
			Cash			17,488
			(To record the income tax expenses incurred)

Table (11)

Post the given transactions to T-accounts using LIFO as follows:

Cash
Bal	36,000
2016	112,000	1.	16,120
		2.	28,160
		4.	24,000
		5.	17,488
Bal.	62,232

Sales revenue
		3.	112,000
		Bal.	112,000

Merchandise Inventory
Bal	24,000
1.	16,120
2.	28,160	3.	44,280
Bal.	24,000

Cost of goods sold
3.	44,280
Bal.	44,280

Common stock
		Bal	25,000
		Bal.	25,000

Retained earnings
			Bal		35,000
			Bal.		35,000
Operating expenses
4.		24,000
Bal.		24,000
Income tax expenses
5.	17,488
Bal.	17,488

b. 3

To determine

Record the given transactions in general journal form and post them to T-accounts under weighted average cost flow method.

Explanation of Solution

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Record the given transactions in general journal form under weighted average cost flow method as follows:

Journal
Date			Account Title and Explanation	Post	Debit	Credit
				Ref.	($)	($)
2016	1.		Merchandise Inventory		16,120
			Cash			16,120
			(To record the purchase of inventory)
2016	2.		Merchandise Inventory		28,160
			Cash			28,160
			(To record the purchase of inventory)
2016	3.		Cash (1)		112,000
			Sales Revenue			112,000
			(To record the sales revenue)
2016			Cost of Goods Sold (Table (8))		43,451
			Merchandise Inventory			43,451
			(To record the cost of goods sold)
2016	4.		Operating Expense		24,000
			Cash			24,000
			(To record the Operating expenses incurred)
2016		5.	Income Tax Expense (5)		17,820
			Cash			17,820
			(To record the income tax expenses incurred)

Table (12)

Post the given transactions to T-accounts using weighted average as follows:

Cash
Bal	36,000
2016	112,000	1.	16,120
		2.	28,160
		4.	24,000
		5.	17,820
Bal.	61,900

Sales revenue
		3.	112,000
		Bal.	112,000

Merchandise Inventory
Bal	24,000
1.	16,120
2.	28,160	3.	43,451
Bal.	24,829

Cost of goods sold
3.	43,451
Bal.	43,451

Common stock
		Bal	25,000
		Bal.	25,000

Retained earnings
		Bal	35,000
		Bal.	35,000

Operating expenses
4.		24,000
Bal.		24,000
Income tax expenses
5.	17,820
Bal.	17,820

c.

To determine

Show the 2016’s income statement, balance sheet and statement of cash flows under FIFO, LIFO and weighted average using a vertical model.

Answer to Problem 18BP

• Show the 2016’s income statement of Company A under each cost flow method as follows:

Company A
Income Statements
For Year Ended December 31, 2016
Particulars	FIFO ($)	LIFO ($)	Weighted average ($)
Sales	112,000	112,000	112,000
Less: Cost of Goods Sold	(42,680)	(44,280)	(43,451)
Gross Margin	69,320	67,720	68,549
Less: Operating Expense	(24,000)	(24,000)	(24,000)
Income Before Tax	45,320	43,720	44,549
Less: Income Tax Expense	(18,128)	(17,488)	(17,820)
Net Income	27,192	26,232	26,729

Table (13)

• Show the 2016’s Balance sheet of Company A under each cost flow method as follows:

Company A
Balance sheet
For Year Ended December 31, 2016
Particulars	FIFO ($)	LIFO ($)	Weighted average ($)
Assets:
Cash	$61,592	$62,232	$61,900
Inventory	25,600	24,000	24,829
Total Assets	$87,192	$86,232	$86,729
Stockholders’ Equity
Common Stock	$25,000	$25,000	$25,000
Retained Earnings	62,192	61,232	61,729
Total Stockholders’ Equity	$87,192	$86,232	$86,729

Table (14)

• Show the 2016’s statement of cash flows of Company A under each cost flow method as follows:

Company A
Statement of cash flows
For Year Ended December 31, 2016
Particulars	FIFO ($)	LIFO ($)	Weighted average ($)
Cash Flows From Operating Activities:
Cash Inflow from Customers	$112,000	$112,000	$112,000
Less: Cash Outflow for Inventory	44,280	44,280	44,280
Cash Outflow for operating expense	(24,000)	(24,000)	(24,000)
Cash Outflow for Income Tax	(18,128)	(17,488)	(17,820)
Net Cash Flow from Operating Activities	25,592	26,232	25,900
Cash Flows From Investing Activities:	-	-	-
Cash Flows From Financing Activities:	-	-	-
Net Change in Cash	25,592	26,232	25,900
Add: Beginning Cash Balance	36,000	36,000	36,000
Ending Cash Balance	$61,592	$62,232	$61,900

Table (15)

Explanation of Solution

Financial statement:

The financial statement records and shows all the financial status of the business. The financial statement consists of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Income statement:

The financial statement that reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Balance sheet:

A balance sheet is a financial statement consists of the assets, liabilities, and the stockholder’s equity of the company. The balance of the assets account must be equal to that of the liabilities and the stockholder’s equity account.