Chapter 5, Problem 5AE

a.

To determine

Compute the amount of ending inventory that Company T would report on the balance sheet under the following methods:

1. 1. FIFO
2. 2. LIFO
3. 3. Weighted average.

Answer to Problem 5AE

1. 1. Compute the amount of ending inventory that Company T would report on the balance sheet under FIFO as follows:

FIFO	Units	Unit Cost	Total
Ending Inventory
September 19	90	$15	$1,350
July 25	70	$13	910
Total Ending Inventory	160 Table (4)		$2,260

Table (1)

1. 2. Compute the amount of ending inventory that Company T would report on the balance sheet under LIFO as follows:

LIFO	Units	Unit Cost	Total
Ending Inventory
January 20	160	$8	$1,280
Total Ending Inventory	160 Table (4)		$1,280

Table (2)

1. 3. Compute the amount of ending inventory that Company T would report on the balance sheet under weighted average as follows:

Weighted	Units	Unit Cost	Total
Ending Inventory	160 Table (4)	$10.51 (1)	$1,681.6

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 which are sold first. The value of the ending inventory consists of the recent purchased items.

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 which are sold first. The value of the closing stock consists of the initial purchased items.

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.

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:

Particular	Unit	Unit cost	Total cost
Purchases:
January 20	400	$8	$3,200
April 21	200	10	2,000
July 25	280	13	3,640
September 19	90	15	1,350
Goods Available for Sale	970		$10,190
Less: Cost of goods sold	810	20	16,200
Ending inventory	160

Table (4)

Determine average unit cost:

$\begin{array}{c}\text{Average Unit cost}=\frac{\text{Goods avaivable for sale}}{\text{Total Units}}\\ =\frac{\text{\$10,190 Table}\left(4\right)}{970}\\ =\text{\$10}\text{.51}\end{array}$ (1)

b.

To determine

Record the transaction in the books of journal and post them into T accounts under the following methods:

1. 1.  FIFO
2. 2. LIFO
3. 3. Weighted average.

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.

Record the transaction in the books of journal as follows:

General Journal of Company T
Date	Account Title and Explanation	Post	Debit	Credit
		Ref.	($)	($)
January 20	Merchandise Inventory		3,200
	Cash			3,200
	(To record the purchase of inventory)
April 21	Merchandise Inventory		2,000
	Cash			2,000
	(To record the purchase of inventory)
July 25	Merchandise Inventory		3,640
	Cash			3,640
	(To record the purchase of inventory)
September 19	Merchandise Inventory		1,350
	Cash			1,350
	(To record the purchase of inventory)

Table (5)

1. 1. Record the transaction of Sales and Cost of Goods Sold under FIFO as follows:

General Journal of Company T
Date	Account Title and Explanation	Post	Debit	Credit
		Ref.	($)	($)
	Cash Table (4)		16,200
	Sales Revenue			16,200
	(To record the sales revenue)
	Cost of Goods Sold Table (9)		7,930
	Merchandise Inventory			7,930
	(To record the cost of goods sold)

Table (6)

• Post the transactions into T accounts under FIFO as follows:

Cash
Year 1	16,200	20-Jan	3,200
		21-Apr	2,000
		25-Jul	3,640
		19-Sep	1,350
Bal.	6,010

Sales revenue
		Year 1	16,200
		Bal.	16,200

Merchandise Inventory
20-Jan	3,200
21-Apr	2,000
25-Jul	3,640
19-Sep	1,350	Year 1	7,930
Bal.	2,260

Cost of goods sold
Year 1	7,930
Bal.	7,930

1. 2. Record the transaction of Sales and Cost of Goods Sold under LIFO:

General Journal of Company T
Date	Account Title and Explanation	Post	Debit	Credit
		Ref.	($)	($)
Year 1	Cash		16,200
	Sales Revenue			16,200
	(To record the sales revenue)
Year 1	Cost of Goods Sold Table (9)		8,910
	Merchandise Inventory			8,910
	(To record the cost of goods sold)

Table (7)

• Post the transactions into T accounts under LIFO as follows:

Cash
Year 1	16,200	20-Jan	3,200
		21-Apr	2,000
		25-Jul	3,640
		19-Sep	1,350
Bal.	6,010

Sales revenue
		Year 1	16,200
		Bal.	16,200

Merchandise Inventory
20-Jan	3,200
21-Apr	2,000
25-Jul	3,640
19-Sep	1,350	Year 1	8,910
Bal.	1,280

Cost of goods sold
Year 1	8,910
Bal.	8,910

1. 3. Record the transaction of Sales and Cost of Goods Sold under Weighted Average:

General Journal of Company T
Date	Account Title and Explanation	Post	Debit	Credit
		Ref.	($)	($)
	Cash		16,200
	Sales Revenue			16,200
	(To record the sales revenue)
	Cost of Goods Sold Table (9)		8,508
	Merchandise Inventory			8,508
	(To record the cost of goods sold)

Table (8)

• Post the transactions into T accounts under weighted average as follows:

Cash
Year 1	16,200	20-Jan	3,200
		21-Apr	2,000
		25-Jul	3,640
		19-Sep	1,350
Bal.	6,010

Sales revenue
		Year 1	16,200
		Bal.	16,200

Merchandise Inventory
20-Jan	3,200
21-Apr	2,000
25-Jul	3,640
19-Sep	1,350	Year 1	8,508
Bal.	1,280

Cost of goods sold
Year 1	8,508
Bal.	8,508

Working note:

Calculate Cost of goods sold:

Particulars	FIFO	LIFO	Weighted Average
Goods Available for Sale	$10,190	$10,190	$10,190
Less: Ending inventory	2,260	1,280	1,681.6
Cost of goods sold	7,930	8,910	8508.4

Table (9)

c.

To determine

Compute the difference in gross margin between FIFO and LIFO cost flow assumptions.

Answer to Problem 5AE

The difference in gross margin between FIFO and LIFO cost flow assumptions is $980$\left(\$8,270-\$7,290\right)$ .

Explanation of Solution

Working note:

Compute the amount of gross margin under FIFO as follows:

Particulars	$
Sales	$16,200
Cost of Goods Sold Table (9)	7,930
Gross Margin	$8,270

Table (10)

Compute the amount of gross margin under LIFO as follows:

Particulars	$
Sales	$16,200
Cost of Goods Sold Table (9)	8,910
Gross Margin	$7,290

Table (11)