Chapter 6, Problem 6.5BP

1.

To determine

To calculate: The ending inventory and the cost of goods sold using FIFO.

Explanation of Solution

Perpetual Inventory System:

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases, and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

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.

Ending Inventory:

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

Calculate the cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
October 4	9	550	4,950
Ending Inventory (1)	9		4,950

Table (1)

Notes:

• The ending inventory is 9 units.
• FIFO method, the cost of first acquired items is assigned to sales first.
• Therefore, the ending inventory of 9 units from October ^4th purchases.

Working notes:

Calculate the units of ending inventory:

$\begin{array}{c}\text{Ending inventory units = Total goods available for sale – sales}\\ \text{= 61 Units – 52Units}\\ \text{= 9 Units}\end{array}$ (1)

Therefore, the cost of Ending Inventory in the FIFO is $4,950.

Calculate the Cost of Goods Sold:

Cost of goods sold:

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

Determine the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per unit ($)	Total Cost ($)
Beginning balance	20	500	10,000
Add:
Purchases  on April 9	30	520	15,600
Purchases  on October 4	2	550	1,100
Cost of Goods Sold	52		26,700

Table (2)

Notes:

• 52 units are sold.
• As it is FIFO method the cost of first acquired items is assigned to sales first.
• Hence, the cost of goods sold will be the first acquired items.

Therefore, the cost of goods sold in the FIFO Method is $26,700.

2.

To determine

To calculate: The ending inventory and the cost of goods sold using LIFO.

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.

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

Calculate the cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Inventory	9	500	4,500
Ending Inventory	9		4,500

Table (3)

Notes:

• The ending inventory is 9 units.
• In LIFO method the ending inventory comprises of the inventory purchased first, because the inventory purchased last were sold first.

Therefore, the cost of ending inventory in the LIFO method is $4,500.

Calculate the Cost of Goods Sold:

Cost of goods sold:

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

Determine the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per unit ($)	Total Cost ($)
January 1	11	500	5,500
April 9	30	520	15,600
October 4	11	550	6,050
Cost of Goods Sold	52		27,150

Table (4)

Notes:

• 11 units from the beginning inventory at the rate of $500 per unit, and
• 30 units from April 4^th purchase at the rate of $520 per unit.
• 11 units from October 4^th purchase at the rate of $550 per unit.

Therefore, the cost of goods sold in the LIFO Method is $27,150.

3.(a)

To determine

The amount of ending inventory to report lower-of-cost-or-market value under FIFO, and also record the adjusting entry.

Explanation of Solution

Lower-of-cost-or-market value:

The lower-of-cost-or-market value is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value (net realizable value) or at its historical cost price, whichever is less.

Compute the amount of ending inventory using lower-of-cost-or-market value method:

Computation of Ending Inventory – Lower-of-cost-or-market Value Method
Inventories	Quantity (Units)	Rate Per Unit($)		Total Cost($)		LCM ($) $\text{(1)}-\text{(2)}$
		Cost Price ($)	Market Price ($)	Cost Price ($) (1)	Market Price ($) (2)
FIFO:
October 4	9	550	350	4,950	3,150	1,800

Table (5)

Therefore, the amount of ending inventory using LCM is $3,150.

Note:

$\begin{array}{l}\text{Total Cost Price}=\text{ Number of Units}\times \text{Cost per Unit}\\ \text{Total Market Cost}=\text{Number of Units}\times \text{Market price per Unit}\end{array}$

Compute the amount of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=}\left(\begin{array}{l}\text{Ending Inventory price }\\ \text{of FIFO}-\text{Market price}\end{array}\right)\\ \text{=\$4,950}-\text{\$3,150}\\ \text{=\$1,800}\end{array}$ (1)

Record the cost of goods sold:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold (1)		1,800
	Inventory			1,800
	(To record the cost of goods sold)

Table (6)

• Cost of goods sold is an expense and increased which has decreased the equity by $1,800. Therefore, debit cost of goods sold account with $1,800.
• Inventory is an asset and decreased by $1,800. Therefore, credit the inventory account with $1,800.

3.(b)

To determine

The amount of ending inventory to report lower-of-cost-or-market value under LIFO, and also record the adjusting entry.

Explanation of Solution

Lower-of-cost-or-market value:

The lower-of-cost-or-market value is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value (net realizable value) or at its historical cost price, whichever is less.

Compute the amount of ending inventory using lower-of-cost-or-market value method:

Computation of Ending Inventory – Lower-of-cost-or-market Value Method
Inventories	Quantity (Units)	Rate Per Unit($)		Total Cost($)		LCM ($) $\text{(1)}-\text{(2)}$
		Cost Price ($)	Market Price ($)	Cost Price ($) (1)	Market Price ($) (2)
LIFO:
October 4	9	500	350	4,500	3,150	1,350

Table (5)

Therefore, the amount of ending inventory using LCM is $3,150.

Note:

$\begin{array}{l}\text{Total Cost Price}=\text{ Number of Units}\times \text{Cost per Unit}\\ \text{Total Market Cost}=\text{Number of Units}\times \text{Market price per Unit}\end{array}$

Compute the amount of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=}\left(\begin{array}{l}\text{Ending Inventory price }\\ \text{of LIFO}-\text{Market price}\end{array}\right)\\ \text{=\$4,500}-\text{\$3,150}\\ \text{=\$1,350}\end{array}$ (1)

Record the cost of goods sold:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold (1)		1,350
	Inventory			1,350
	(To record the cost of goods sold)

Table (6)

• Cost of goods sold is an expense and increased which has decreased the equity by $1,350. Therefore, debit cost of goods sold account with $1,350.
• Inventory is an asset and decreased by $1,350. Therefore, credit the inventory account with $1,350.