Chapter 6, Problem 2PB

(1)

To determine

Calculate the ending inventory and cost of goods sold using the specific identification method:

Explanation of Solution

Specific identification method: Specific identification method identifies the cost of each specific unit of inventory available for sale.

Calculate the units of ending inventory:

Calculation of Ending Inventory
Details	Number of Units	Rate Per Unit ($)	Total Cost ($)
Beginning balance	8
Less: Sales - August 4	(5)
Balance	3
Less: Sales - August 26	(1)
Balance	2	160	320
Purchases:
August 11	10
Less: Sales - August 13	(8)
Balance	2	150	300
August 20	10
Less: Sales August 26	(10)
Balance	0	140	-
August 29	11	130	1,430
Ending Inventory	15		2,050

Table 1

Therefore, the cost of Ending Inventory in specific identification method is $2,050.

Calculate the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate Per Unit ($)	Total Cost ($)
August 4: Beginning balance	5	160	800
August 13: August11 Purchase	8	150	1,200
August 26:
Beginning Inventory	1	160	160
August 20 Purchase	10	140	1,400
Cost of Goods Sold	24		3,560

Table 2

Therefore, the Cost of Goods Sold in specific identification method is $3,560.

(2)

To determine

Calculate the Ending Inventory and Cost of Goods Sold using FIFO method.

Answer to Problem 2PB

Calculate the cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
August 29	11	130	1,430
August 20	4	140	560
Ending Inventory	15		1,990

Table 3

Therefore, the cost of Ending Inventory in the FIFO is $1,990.

Calculate the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Inventory	8	160	1,280
August 11 Purchase	10	150	1,500
August 20 Purchase	6	140	840
Cost of Goods Sold	24		3,620

Table 4

Therefore, the cost of goods sold in the FIFO Method is $3,620.

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.

Working note:

Calculate the units of ending inventory.

Calculation of Ending Inventory (Units)
Details	Number of Units	Number of Units
Beginning balance	8
Add: Purchases
August 11	10
August 20	10
August 29	11
Total Goods available for Sale		39
Less: Sales
August 4	5
August 13	8
August 26	11
Total Sales		(24)
Ending Inventory		15

Table 5

• The ending inventory is 15 units.
• In FIFO method the ending inventory comprises of the inventory purchased last, because the inventory purchased first were sold first.
• Therefore, the ending inventory of 15 units Comprises the following

1. 1. 1. 11 units from August 29^th purchase at the rate of $130 per unit, and
   2. 2. The balance of 5 units from August 20^th purchase at the rate of $10 per unit.

For Cost of Goods Sold:

• 24 units are sold.
• As it is FIFO method the earlier purchased items will sell first.
• Hence, the cost of goods sold will be the earlier purchased items and comprises the following:
  • 8 units from beginning inventory at the rate of $160 per unit.
  • 10 units from August 11^th purchase at the rate of $150 per unit, and
  • The rest 6 units from the August 20^th purchase at the rate of $140 per unit.

(3)

To determine

Calculate the Ending Inventory and Cost of Goods Sold using LIFO method.

Answer to Problem 2PB

Calculate the cost of ending inventory.

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Inventory	8	160	1,280
August 11	7	150	1,050
Ending Inventory	15		2,330

Table 6

Therefore, the cost of Ending Inventory in the LIFO method is $2,330.

Calculate the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per unit ($)	Total Cost ($)
August 29 Purchase	11	130	1,430
August 20 Purchase	10	140	1,400
August 11	3	150	450
Cost of Goods Sold	24		3,280

Table 7

Therefore, the Cost of Goods Sold in the LIFO Method is $3,280.

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

• The ending inventory is 15 units (Refer to Table 5).
• In LIFO method the ending inventory comprises of the inventory purchased first, because the inventory purchased last were sold first.
• Therefore, the ending inventory of 15 units comprises the following:
  • 8 units from the beginning inventory at the rate of $150 per unit, and
  • 7 units from August 11^th purchase at the rate of $150 per unit.

(4)

To determine

Calculate the Ending Inventory and Cost of Goods Sold using Weighted-average method:

Answer to Problem 2PB

Calculate the amount of Ending Inventory:

$\begin{array}{c}\text{Cost of Ending inventory}=\left(\begin{array}{l}\text{Number of units in Ending inventory}\\ \times \text{Weighted-average cost per unit (1)}\end{array}\right)\\ =15\text{ units }\times \text{ \$143}\text{.8462}\\ =\text{\$2,157}\text{.69}\end{array}$

Therefore, the cost of Ending Inventory in the Weighted-average-cost Method is $2,157.69.

Calculate the Cost of Goods Sold:

$\begin{array}{c}\text{Cost of Goods Sold}=\left(\begin{array}{l}\text{Number of units Sold }\\ \times \text{Weighted-average cost per unit}\end{array}\right)\\ =24\text{ units}\times \text{\$143}\text{.8462}\\ =\text{\$3,452}\text{.31}\end{array}$

Therefore, the Cost of goods sold in the Weighted-average-cost Method is $3,452.31.

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.

Working notes:

Calculate the Weighted-average cost.

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\text{\$5,610 Table(1)}}{\text{39 Units}}\\ =\$143,8462\end{array}$ (1)

Calculate the amount of goods available for sale:

Calculation of Goods Available for Sales
Details	Number of Units	Rate per unit ($)	Total Cost ($)
Beginning balance	8	160	1,280
Add: Purchases
August 11	10	150	1,500
August 20	10	140	1,400
August 29	11	130	1,430
Total Goods available for Sale	39		5,610

Table 8

(5)

To determine

Calculate the sales revenue and gross profit under the four methods.

Explanation of Solution

Gross profit method:

This method is use the estimated gross profit for the period to evaluate and ascertain the ending inventory for the period. The gross profit for the period is calculated from the preceding year, which is adjusted for any current period changes in the sales and cost price of the inventory.

The sales revenue and gross profit under the four methods is calculated as follows.

Sales:	Units	Rate Per Unit ($)	Total ($)	($)	($)	($)	($)
August 4	5	225	1,125
August 13	8	240	1,920
August 26	11	250	2,750
Total Sales Revenue				5,795	5,795	5,795	5,795.00
Cost of Goods Sold				(3,560)	(3,620)	(3,280)	(3,452.31)
Gross Profit				2,235	2,175	2,515	2,342.69

Table 9

(6)

To determine

Compare the ending inventory in FIFO and LIFO.

Answer to Problem 2PB

The ending inventory computed in the FIFO method provides more meaningful.

Explanation of Solution

This is because the ending inventory computed using the FIFO method is $1,990 and LIFO method is $2,330. The current cost of the ending inventory is $\$1,950\left(15\text{ Units }\times \text{ \$130}\right)$. From this it is clear that the ending inventory computed in FIFO method shows approximately the current cost of the inventory. Hence, the ending inventory computed in the FIFO method provides more meaningful.

(7)

To determine

Record the LIFO adjustment.

Answer to Problem 2PB

Record the LIFO adjustment.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Inventory (Table 11)		340
	Cost of Goods Sold			340
	(To record the LIFO adjustment)

Table 10

Explanation of Solution

Periodic Inventory System:

Periodic inventory system is a system, in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

• Merchandised inventory is an asset and increased. Therefore, debit the merchandised inventory account with $340.
• Cost of Goods Sold is expense and decreased which will increase the equity. Therefore, credit the cost of goods sold account with $340.

Working note:

Compute the amount of LIFO adjustment:

Particulars	Amount ($)
Ending inventory valued in LIFO	$2,330
Ending inventory valued in FIFO	$1,990
LIFO Adjustment	$340

Table 11