Chapter 8, Problem 8.5P

1.

To determine

Periodic Inventory System:

It 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.

Perpetual Inventory System:

It is 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.

In First-in-First-Out method, the cost of initial purchased items are sold first. The value of the ending inventory consists the recent purchased items.

In Last-in-First-Out method, the cost of last purchased items are sold first. The value of the closing stock consists the initial purchased items.

In Weighted-Average Cost Method the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:

$\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}$

To Compute: The ending inventory and cost of goods sold for the month of January in the following methods.

Explanation of Solution

Calculate the total cost and units of goods available for sales.

Calculation of Goods Available for Sales
Details	Number of Units	Rate per unit ($)	Total Cost ($)
Beginning balance	6,000	8	48,000
Add: Purchases
January 10	5,000	9	45,000
January 18	6,000	10	60,000
Total Goods available for Sale	17,000		153,000

Table (1)

Calculate the cost of ending inventory under FIFO, periodic system.

Calculation of Cost of Ending Inventory (FIFO)
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
January 18	6,000	10	60,000
January 10	2,000	9	18,000
Ending Inventory	8,000		78,000

Table (2)

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$153,000 }-\$78,000\\ =\$75,000\end{array}$

Therefore, the cost of ending inventory, and the cost of goods sold in the FIFO method is $78,000, and $75,000 respectively.

2.

To determine

To Calculate: the cost of ending inventory, and cost of goods sold under LIFO, periodic system.

Explanation of Solution

Calculation of Cost of Ending Inventory (LIFO)
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Balance	6,000	8	48,000
January 10	2,000	9	18,000
Ending Inventory	8,000		66,000

Table (3)

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$153,000 }-\$66,000\\ =\$87,000\end{array}$

Therefore, the cost of ending inventory, and the cost of goods sold in the LIFO method is $66,000, and $87,000 respectively.

3.

To determine

To Calculate: the cost of ending inventory, and cost of goods sold under LIFO, perpetual system.

Explanation of Solution

Figure (1)

Therefore, the cost of ending merchandised inventory and cost of goods sold are $71,000 and $82,000 respectively.

4.

To determine

To Calculate: the cost of ending inventory under average cost, periodic system.

Explanation of Solution

Number of units in ending inventory = 8,000

Weighted average cost per unit = $9 (1)

$\begin{array}{c}\text{Cost of Ending inventory = }\left(\begin{array}{l}\text{Number of units in Ending inventory }\\ \times \text{ Weighted-average cost per unit}\end{array}\right)\\ =8,000\text{ units }\times \$9.00\\ \text{=}\text{\$72,000}\end{array}$

Working Note:

Calculate the Weighted-average cost.

$\begin{array}{c}\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$153,000}{17,000\text{ Units}}\\ =\$9.00\end{array}$ (1)

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\$153,000-\$72,000\\ =\$81,000\end{array}$

Therefore, the cost of ending inventory, and the cost of goods sold in the Average-cost method is $72,000, and $81,000 respectively.

5.

To determine

To Calculate: the cost of ending inventory, and cost of goods sold under average cost, perpetual system.

Explanation of Solution

Figure (2)

Working Notes:

Calculate the Weighted-average cost after the January 10^th purchase.

$\begin{array}{c}\text{Weighted-average Cost}=\frac{\left(\begin{array}{l}\text{Total Cost of Goods Available For Sale }\\ \text{after the purchase of January 10}\end{array}\right)}{\text{Total number of units Available for Sale}}\\ =\frac{\$69,000}{\text{8,000 Units}}\\ =\$8.625\end{array}$ (2)

Calculate the Weighted-average cost after the January 18^th purchase.

$\begin{array}{c}\text{Weighted-average Cost}=\frac{\left(\begin{array}{l}\text{Total Cost of Goods Available For Sale }\\ \text{after the purchase of January 18}\end{array}\right)}{\text{Total number of units Available for Sale}}\\ =\frac{\$111,750}{\text{12,000 Units}}\\ =\$9.3125\end{array}$ (3)

Therefore, the cost of ending merchandised inventory and cost of goods sold are 74,500 and $78,500 respectively.