Chapter 6, Problem 6SP

a.

To determine

Ascertain the cost of goods sold and the ending inventory cost at December 31, 2012 under (a) first-in first-out, (b) last-in first-out, and (c) weighted average cost method.

Explanation of Solution

Periodic inventory system: The method or system of recording the transactions related to inventory occasionally or periodically are referred to as periodic inventory system.

First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.

Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.

Weighted-average Cost Method: In this method, the inventories are priced at the average rate of goods available for sales.

Ascertain the cost of goods sold and the ending inventory cost at December 31, 2012 under (a) first-in first-out, (b) last-in first-out, and (c) weighted average cost method as follows:

a. First-in-First-Out (FIFO):

Cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
January 23	40	4	160
Ending Inventory	40	-	160

Table (1)

Therefore, the ending inventory of Company K under first-in first out method is $160.

Cost of goods sold:

Here,

Goods available for sale is $4,150 (Refer Table 2)

Ending inventory is 160 (Refer Table 1)

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$4,150 }-\$160\\ =\$3,990\end{array}$

Therefore, the cost of goods sold of Company K under first-in first out method is $3,990.

Working note:

Calculate the total cost and goods available for sales

Calculation of Goods Available for Sales
Details	Number of Units	Rate per unit ($)	Total Cost ($)
Beginning balance, January 1	0	0	0
Add: Purchases
January 10	400	3	1,200
January 17	500	3.5	1,750
January 23	300	4	1,200
Total Goods available for Sale	1,200		4,150
Less: Sales:
January 15	360
January 21	420
January 27	380
Ending Inventory	40

Table (2)

b. Last-in-First-Out (LIFO):

Cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
January 10	40	3	120
Ending Inventory	40	-	120

Table (3)

Therefore, the ending inventory of Company K under last-in first out method is $120.

Cost of goods sold:

Goods available for sale is $4,150 (Refer Table 2)

Ending inventory is $120 (Refer Table – 3)

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$4,150 }-\$120\\ =\$4,030\end{array}$

Therefore, the cost of goods sold of Company K under last-in first out r method is $4,030.

c. Weighted average Cost Method:

Cost of ending inventory:

Here,

Weighted- average cost per unit is $3.458 (1)

Number of units in ending inventory is 40 units

$\begin{array}{c}\text{Cost of Ending inventory = }\left(\begin{array}{l}\text{Number of units in Ending inventory }\\ \times \text{ Weighted-average cost per unit}\end{array}\right)\\ =40\text{ units }\times \text{ \$3}\text{.458}\\ \text{=}\text{\$138}\end{array}$

Therefore, the ending inventory of Company K under weighted average cost method is $138.

Cost of goods sold:

Goods available for sale is $4,150 (Refer Table 2 )

Ending inventory is $138

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$4,150 }-\$138\\ =\$4,012\end{array}$

Therefore, the cost of goods sold of Company K under last-in first out method is $4,012.

Working note:

Calculate the weighted average cost per unit

Total cost of goods available for sale is $4,150 (Refer Table 2)

Total units of goods available for sale is 1,200 units (Refer Table 2)

$\begin{array}{c}\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$4,150}{1,200}\\ =\$3.458\end{array}$ (1)

b.

To determine

Ascertain the cost of ending inventory on the January 31 under the three inventory costing method, if Company K uses replacement cost.

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.

Ascertain the cost of ending inventory on the January 31 under the three inventory costing method, if Company K uses replacement cost as follows:

Value of ending inventory on the January 31 balance sheet (When the Replacement Cost of Ending inventory is $4)
Method	Total cost of ending inventory at Acquisition Cost ($) (a)	Total cost of ending inventory at Replacement Cost ($) (b)	Ending inventory reported on January 31 balance sheet (Lesser of (a) and (b)
FIFO	$160 (Refer table 1)	$160 (2)	$160
LIFO	$120 (Refer table 3)	$160 (2)	$120
WA	$138	$160 (2)	$138

Table (4)

Therefore, if the replacement cost of the inventory at year-end is $160, then the ending inventory under FIFO, LIFO and weighted average cost method are $160, $120, and $138 respectively.

Working note:

Calculate the value of ending inventory under replacement cost

Here,

Ending inventory units is 40 units

Replacement cost is $4 per unit

$\begin{array}{c}\begin{array}{l}\text{Total cost of inventory }\\ \text{at replacement cost }\end{array})\text{= Ending inventory units }\times \text{ Replacement cost}\\ \text{=}40\text{units}\times \$4\\ =\$160\end{array}$ (2)