Concept explainers
Dymac Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the next 12 months, and the inventory count at December 31 are summarized as follows:
Instructions
- 1. Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings:
If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase.
- 2. Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1).
- 3. Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1).
- 4. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.
(1)
Determine the value of inventory using first in first out method under periodic inventory system.
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.
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.
The tabular column showing inventory cost is presented as follows:
Model | Quantity ($) | Unit cost ($) | Total cost ($) |
A10 | 4 | 76 | 304 |
2 | 70 | 140 | |
B15 | 6 | 184 | 1,104 |
2 | 170 | 340 | |
E60 | 5 | 70 | 350 |
G83 | 9 | 259 | 2,331 |
J34 | 15 | 270 | 4,050 |
M90 | 3 | 130 | 390 |
2 | 128 | 256 | |
Q70 | 7 | 180 | 1,260 |
1 | 175 | 175 | |
Total | 10,700 |
Hence, the ending inventory under First in First out Method is $10,700.
(2)
Determine the value of inventory using last in first out method under periodic inventory system.
Explanation of Solution
The tabular column showing inventory cost is presented as follows:
Model | Quantity ($) | Unit cost ($) | Total cost ($) |
A10 | 4 | 64 | 256 |
2 | 70 | 140 | |
B15 | 8 | 176 | 1,408 |
E60 | 3 | 75 | 225 |
1 | 65 | 130 | |
G83 | 7 | 242 | 1,694 |
2 | 250 | 500 | |
J34 | 12 | 240 | 2,880 |
3 | 246 | 738 | |
M90 | 2 | 108 | 216 |
2 | 110 | 220 | |
1 | 128 | 128 | |
Q70 | 5 | 160 | 800 |
3 | 170 | 510 | |
Total | 9,845 |
Hence, the ending inventory under Last in First out Method is $9,845.
(3)
Determine the value of inventory using weighted average method under periodic inventory system.
Explanation of Solution
The tabular column showing inventory cost is presented as follows:
Model | Quantity ($) | Unit cost ($) | Total cost ($) |
A10 | 6 | 70 (1) | 256 |
B15 | 8 | 174 (2) | 1,392 |
E60 | 5 | 69 (3) | 345 |
G83 | 9 | 253 (4) | 2,277 |
J34 | 15 | 258 (5) | 3,870 |
M90 | 5 | 121 (6) | 605 |
Q70 | 8 | 172 (7) | 1,376 |
10,285 |
Working note 1:
Computation of unit cost for Model A10:
Working note 2:
Computation of unit cost for Model B15:
Working note 3:
Computation of unit cost for Model E60:
Working note 4:
Computation of unit cost for Model G83:
Working note 5:
Computation of unit cost for Model J34:
Working note 6:
Computation of unit cost for Model M90:
Working note 7:
Computation of unit cost for Model Q70:
Hence, the ending inventory under weighted average cost Method is $10,285.
(4.a)
Discuss the method that would be preferred for income tax purposes in the period of rising prices.
Explanation of Solution
During the period of rising prices, the last in first out method will result in lower cost of inventory, the cost of merchandise sold will be higher, and net income would be lower than other two methods. Therefore, the LIFO method would be preferred for the current year because it would effect in lower income tax.
(4.b)
Discuss the method that would be preferred for income tax purposes in the period of declining prices.
Explanation of Solution
During the period of declining prices, the first in first out method (FIFO) will result in lower cost of inventory, the cost of merchandise sold will be higher, and net income would be lower than other two methods. Therefore, the FIFO method would be preferred for the current year because it would effect in lower income tax.
Want to see more full solutions like this?
Chapter 7 Solutions
Cengagenowv2, 1 Term Printed Access Card For Warren/reeve/duchac's Financial Accounting, 15th
- Pappas Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the year, and the inventory count at December 31 are summarized as follows: Instructions 1. Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings: If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase. 2. Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1). 3. Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1). 4. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.arrow_forwardThe beginning inventory for Dunne Co. and data on purchases and sales for a three-month period are shown in Problem 7-1B. Instructions 1. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the first-in, first-out method and the periodic inventory system. 2. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the last-in, first-out method and the periodic inventory system. 3. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the weighted average cost method and the periodic inventory system. Round the weighted average unit cost to the dollar. 4. Compare the gross profit and June 30 inventories using the following column headings:arrow_forwardData on the physical inventory of Ashwood Products Company as of December 31 follow: Quantity and cost data from the last purchases invoice of the year and the next-to-the-last purchases invoice are summarized as follows: Instructions Determine the inventory at cost as well as at the lower of cost or market, using the first-in, first-out method. Record the appropriate unit costs on the inventory sheet and complete the pricing of the inventory. When there are two different unit costs applicable to an item, proceed as follows: 1. Draw a line through the quantity and insert the quantity and unit cost of the last purchase. 2. On the following line, insert the quantity and unit cost of the next-to-the-last purchase. 3. Total the cost and market columns and insert the lower of the two totals in the Lower of C or M column. The first item on the inventory sheet has been completed as an example.arrow_forward
- Jessie Stores uses the periodic system of calculating inventory. The following information is available for December of the current year when Jessie sold 500 units of inventory. Using the FIFO method, calculate Jessies inventory on December 31 and its cost of goods sold for December.arrow_forwardData on the physical inventory of Katus Products Co. as of December 31 follow: Quantity and cost data from the last purchases invoice of the year and the next-to-the-last purchases invoice are summarized as follows: Instructions Determine the inventory at cost as well as at the lower of cost or market, using the first-in, first-out method. Record the appropriate unit costs on the inventory sheet and complete the pricing of the inventory. When there are two different unit costs applicable to an item: 1. Draw a line through the quantity and insert the quantity and unit cost of the last purchase. 2. On the following line, insert the quantity and unit cost of the next-to-the-last purchase. 3. Total the cost and market columns and insert the lower of the two totals in the LCM column. The first item on the inventory sheet has been completed as an example.arrow_forwardGolden Eagle Company began operations on April 1 by selling a single product. Data on purchases and sales for the year are as follows: Purchases: Sales: The president of the company, Connie Kilmer, has asked for your advice on which inventory cost flow method should be used for the 32,000-unit physical inventory that was taken on December 31. The company plans to expand its product line in the future and uses the periodic inventory system. Write a brief memo to Ms. Kilmer comparing and contrasting the LIFO and FIFO inventory cost flow methods and their potential impacts on the companys financial statements.arrow_forward
- Carla Company uses the perpetual inventory system. The following information is available for January of the current year when Carla sold 1,600 units of inventory on January 14. Using the FIFO method, calculate Carlas cost of goods sold for January and its January 31 inventory.arrow_forwardJessie Stores uses the periodic system of calculating inventory. The following information is available for December of the current year when Jessie sold 500 units of inventory. Using the FIFO method, calculate Jessies inventory on December 31 and its cost of goods sold for December. RE7-11 Using the information from RE7-10, calculate Jessie Storess inventory on December 31 and its cost of goods sold for December using the LIFO method.arrow_forwardBeginning inventory, purchases, and sales for Item Widget are as follows: Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on March 25 and (b) the inventory on March 31.arrow_forward
- FIFO perpetual inventory The beginning inventory at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows: Instructions 1. Record the inventory, purchases, and cost of goods sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3, using the first-in, first-out method. 2. Determine the total sales and the total cost of goods sold for the period. Journalize the entries in the sales and cost of goods sold accounts. Assume that all sales were on account. 3. Determine the gross profit from sales for the period. 4. Determine the ending inventory cost on June 30. 5. Based upon the preceding data, would you expect the ending inventory using the last-in, first-out method to be higher or lower?arrow_forwardSelected transactions for Niles Co. during March of the current year are listed in Problem 6-1B. Instructions Journalize the entries to record the transactions of Niles Co. for March using the periodic inventory system.arrow_forwardPalisade Creek Co. is a retail business that uses the perpetual inventory system. The account balances for Palisade Creek as of May 1, 20Y6 (unless otherwise indicated), are as follows: During May, the last month of the fiscal year, the following transactions were completed: Record the following transactions on Page 21 of the journal: Instructions 1. Enter the balances of each of the accounts in the appropriate balance column of a four-column account. Write Balance in the item section, and place a check mark () in the Posting Reference column. Journalize the transactions for May, starting on Page 20 of the journal. 2. Post the journal to the general ledger, extending the month-end balances to the appropriate balance columns after all posting is completed. In this problem, you are not required to update or post to the accounts receivable and accounts payable subsidiary ledgers. 3. Prepare an unadjusted trial balance. 4. At the end of May, the following adjustment data were assembled. Analyze and use these data to complete (5) and (6). 5. (Optional) Enter the unadjusted trial balance on a 10-column end-of-period spreadsheet (work sheet), and complete the spreadsheet. 6. Journalize and post the adjusting entries. Record the adjusting entries on Page 22 of the journal. 7. Prepare an adjusted trial balance. 8. Prepare an income statement, a statement of stockholders equity, and a balance sheet. Assume that additional common stock of 10,000 was issued in January 20Y6. 9. Prepare and post the closing entries. Record the closing entries on Page 23 of the journal. Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry. Insert the new balance in the retained earnings account. 10. Prepare a post-closing trial balance.arrow_forward
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning