Chapter 13, Problem 6Q

To determine

First-in First-Out method (FIFO): In First-in-First-Out method, the costs of initial purchased items are sold first. The value of the ending inventory consists of the recent purchased items.

Last-in First-Out method (LIFO): In Last-in-First-Out method, the costs of last purchased items are sold first. The value of the closing stock consists of the initial purchased items.

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the salvage value is shown as below:

$\text{Depreciation cost = }\frac{\left(\text{Cost of the asset-Salvage value}\right)}{\text{Estimated useful life of the asset}}$

Declining-balance depreciation:

It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

$\text{Annual depreciation }=\text{ Purchase price }\times \left(\frac{2}{\text{Useful life}}\right)$

a)

To determine: Use of FIFO instead of LIFO

b)

To determine

Use of 6-year life instead of 9-year life machinery.

c)

To determine

Use of depreciation method