Fundamental Financial Accounting Concepts, 9th Edition
Fundamental Financial Accounting Concepts, 9th Edition
9th Edition
ISBN: 9780078025907
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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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.

a.

Expert Solution
Check Mark

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:
FIFOUnitsUnit CostTotal
Ending Inventory
September 1990$15$1,350
July 2570$13910
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:
LIFOUnitsUnit CostTotal
Ending Inventory
January 20160$8$1,280
Total Ending Inventory160 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:
WeightedUnitsUnit CostTotal
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:

ParticularUnitUnit costTotal cost
Purchases:
January 20400$8$3,200
April 21200102,000
July 25280133,640
September 1990151,350
Goods Available for Sale970$10,190
Less: Cost of goods sold8103024,300
Ending inventory160

Table (4)

Determine average unit cost:

Average Unit cost=Goods avaivable for saleTotal Units=$10,190 Table(4)970=$10.51 (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.

b.

Expert Solution
Check Mark

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
DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
January 20Merchandise Inventory3,200
Cash3,200
(To record the purchase of inventory)
April 21Merchandise Inventory2,000
Cash2,000
(To record the purchase of inventory)
July 25Merchandise Inventory3,640
Cash3,640
(To record the purchase of inventory)
September 19Merchandise Inventory1,350
Cash1,350
(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
DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
Cash Table (4)24,300
Sales Revenue24,300
(To record the sales revenue)
Cost of Goods Sold Table (9)7,930
Merchandise Inventory7,930
(To record the cost of goods sold)

Table (6)

  • Post the transactions into T accounts under FIFO as follows:
Cash                  
201624,30020-Jan3,200
21-Apr2,000
25-Jul3,640
19-Sep1,350
Bal.14,110
Sales revenue                  
201624,300
Bal.24,300
Merchandise Inventory
20-Jan3,200
21-Apr2,000
25-Jul3,640
19-Sep1,35020167,930
Bal.2,260
Cost of goods sold                    
20167,930
Bal.7,930
  1. 2. Record the transaction of Sales and Cost of Goods Sold under LIFO:
General Journal of Company T
DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
2016Cash24,300
Sales Revenue24,300
(To record the sales revenue)
2016Cost of Goods Sold Table (9)8,910
Merchandise Inventory8,910
(To record the cost of goods sold)

Table (7)

  • Post the transactions into T accounts under LIFO as follows:
Cash                  
201624,30020-Jan3,200
21-Apr2,000
25-Jul3,640
19-Sep1,350
Bal.14,110
Sales revenue                  
201624,300
Bal.24,300
Merchandise Inventory
20-Jan3,200
21-Apr2,000
25-Jul3,640
19-Sep1,35020168,910
Bal.1,280
Cost of goods sold                    
20168,910
Bal.8,910
  1. 3. Record the transaction of Sales and Cost of Goods Sold under Weighted Average:
General Journal of Company T
DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
Cash24,300
Sales Revenue24,300
(To record the sales revenue)
Cost of Goods Sold Table (9)8,508
Merchandise Inventory8,508
(To record the cost of goods sold)

Table (8)

  • Post the transactions into T accounts under weighted average as follows:
Cash                  
201624,30020-Jan3,200
21-Apr2,000
25-Jul3,640
19-Sep1,350
Bal.14,110
Sales revenue                  
201624,300
Bal.24,300
Merchandise Inventory
20-Jan3,200
21-Apr2,000
25-Jul3,640
19-Sep1,35020168,508
Bal.1,280
Cost of goods sold                    
20168,508
Bal.8,508

Working note:

Calculate Cost of goods sold:

ParticularsFIFOLIFOWeighted Average
Goods Available for Sale$10,190$10,190 $10,190
Less: Ending inventory2,2601,2801,681.6
Cost of goods sold7,9308,9108508.4

Table (9)

c.

To determine

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

c.

Expert Solution
Check Mark

Answer to Problem 5AE

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

Explanation of Solution

Working note:

Compute the amount of gross margin under FIFO as follows:

Particulars$
Sales$24,300
Cost of Goods Sold Table (9) 7,930
Gross Margin$16,370

Table (10)

Compute the amount of gross margin under LIFO as follows:

Particulars$
Sales$24,300
Cost of Goods Sold Table (9)8,910
Gross Margin$15,390

Table (11)

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