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Chapter 8: Question 14E (page 426)

The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2017.

May 1 Balance 400 units @ \(20 May 10 Sale 300 units @ \)38

12 Purchase 600 units @ \(25 20 Sale 540 units @ \)38

28 Purchase 400 units @ $30

Instructions

(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO?

(b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.

Short Answer

Expert verified

Answer

The value of periodic ending inventory under FIFO and LIFO are $16,000 and $12,000, respectively. Under perpetual inventory, these figures are $16,000 and $15,500, respectively.

Step by step solution

01

Value of ending inventory under periodic method

Endinginventory(Units)=Totalunitsavailableforsale-Totalunitssold=1,400-840=560

1) Using FIFO

Date

Units

Cost per unit

Amount

May 28

400

$30

$12000

May 12

160

$25

$4000

Total

560

$16,000

The value of ending inventory by FIFO is $16,000.

2) Using LIFO

Date

Units

Cost per unit

Amount

Beginning

400

$20

$8000

May 12

160

$25

$4000

Total

560

$12,000

The value of ending inventory by FIFO is $12,000.

3) Using Weighted Average

Averagecost=TotalvalueofavailableunitsTotalavailableunits=$35,0001,400=$25

Valueofendinginventory=Averagecost×Endinginventory=$25×560=$14,000


02

Value of ending inventory under perpetual method

1) Using FIFO

Date

Purchase

Cost of goods sold

Balance

May 1

Beginning 400 units @ $20

$8,000

May 10

300 units @ $20

-$6,000

$2,000

May 12

600 units @ $25

$15,000

$17,000

May 20

100 units @ $20

-$2000

440 units @ 25

-$11,000

$4,000

May 28

400 units @ $30

$12,000

$16,000

The value of ending inventory amounts to $16,000.

2) Using LIFO

Date

Purchase

Cost of goods sold

Balance

May 1

Beginning 400 units @ $20

$8,000

May 10

300 units @ $20

-$6,000

$2,000

May 12

600 units @ $25

$15,000

$17,000

May 20

540 units @ $25

-$13,500

$3,500

May 28

400 units @ $30

$12,000

$15,500

The value of ending inventory amounts to $15,500.

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Most popular questions from this chapter

Bienvenu Enterprises reported cost of goods sold for 2017 of \(1,400,000 and retained earnings of \)5,200,000 at December 31, 2017. Bienvenu later discovered that its ending inventories at December 31, 2016 and 2017, were overstated by\(110,000 and \)35,000, respectively. Determine the corrected amounts for 2017 cost of goods sold and December 31, 2017,retained earnings.

Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Units Unit Total Units Selling Total

InCostSoldPrice

Date Transaction

July 1 Balance 100 \(4.10 \) 410

6 Purchase 800 4.20 3,360

7 Sale 300\(7.00 \) 2,100

10 Sale 300 7.30 2,190

12 Purchase 400 4.50 1,800

15 Sale 200 7.40 1,480

18 Purchase 300 4.60 1,380

22 Sale 400 7.40 2,960

25 Purchase 500 4.58 2,290

30 Sale 200 7.50 1,500

Totals 2,100\(9,240 1,400\)10,230

Instructions

(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

(1) FIFO.

(2) LIFO.

(3) Weighted-average.

(b) Answer the following questions.

(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.

(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.

FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.

The management of Tritt Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing are the company’s financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

Financial Position as of

12/31/16 12/31/17 12/31/18

Cash \( 90,000 \)130,000 \(154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets \)450,000 \(540,000 \)650,000

Accounts payable \( 40,000 \) 60,000 \( 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity \)450,000 \(540,000 \)650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue \(900,000 \)1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income \(114,000 \) 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at \(3.00 each.

2. Sales (all units sold at the same price in a given year):

2017—150,000 units @ \)6.00 each 2018—180,000 units @ \(7.50 each

3. Purchases (all units purchased at the same price in given year):

2017—150,000 units @ \)3.50 each 2018—180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFOhad been used, and state the new amount for each account that is named. Show computations.

Distinguish between product costs and period costs as they relate to inventory.
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