   Chapter 7, Problem 7.5BPR

Chapter
Section
Textbook Problem

Periodic inventory by three methodsPappa’s 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: Instructions1.    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:   Model Quantity Unit Cost Total Cost   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)

To determine

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.

To determine: value of inventory using first in first out method under periodic inventory system.

Explanation

The tabular column showing inventory cost is presented as follows:

 Model Quantity ($) Unit cost ($) Total cost (\$) C55 3 1,070 3,210 1 1,060 1,060 D11 6 675 4,050 5 666

(2)

To determine
value of inventory using last in first out method under periodic inventory system.

(3)

To determine
value of inventory using weighted average method under periodic inventory system.

(4.a)

To determine

To discuss: the method that would be preferred for income tax purposes in the period of rising prices.

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