Concept explainers
COST ALLOCATION AND LOWER-OF-COST-OR-MARKET Hall Company’s beginning inventory and purchases during the fiscal year ended December 31, 20--, were as follows:
There are 1,100 units of inventory on hand on December 31.
REQUIRED
- 1. Calculate the total amount to be assigned to the ending inventory and cost of goods sold on December 31 under each of the following methods:
- (a) FIFO
- (b) LIFO
- (c) Weighted-average (round calculations to two decimal places)
- 2. Assume that the market price per unit (cost to replace) of Hall’s inventory on December 31 was $16. Calculate the total amount to be assigned to the ending inventory on December 31 under each of the following methods:
- (a) FIFO lower-of-cost-or-market
- (b) Weighted-average lower-of-cost-or-market
- 3. Prepare required entries to apply:
- (a) FIFO lower-of-cost-or-market
- (b) Weighted-average lower-of-cost-or-market
1.
(a)
Calculate the total amount of cost of goods sold and cost of ending inventory on September 30, 20-2 under FIFO method.
Explanation of Solution
First-in-First-Out (FIFO): In First-in-First-Out method, the first purchased items are sold first. The value of the ending inventory consists of the recently purchased items.
Calculate the total amount of cost of goods sold and cost of ending inventory on September 30, 20-2 under FIFO method:
Table (1)
Therefore, the cost of sold and cost of ending inventory under FIFO (Periodic inventory system) is $55,950 and $20,750.
2.
(b)
Calculate the total amount of cost of goods sold and cost of ending inventory on September 30, 20-2 under LIFO method.
Explanation of Solution
Last-in-First-Out (LIFO): In Last-in-First-Out method, the last purchased items are sold first. The value of the closing stock consists of the initially purchased items.
Calculate the total amount of cost of goods sold and cost of ending inventory on September 30, 20-2 under LIFO method:
Table (2)
Therefore, the cost of sold and cost of ending inventory under LIFO (Periodic inventory system) is $64,300 and $12,400.
3.
(c)
Calculate the total amount of cost of goods sold and cost of ending inventory on September 30, 20-2 under weighted average cost method.
Explanation of Solution
Weighted-average cost method: Under average cost method inventories are priced at the average of all available inventories. Average cost is the quotient of total cost of goods available for sale and total units available for sale.
Calculate the total amount of cost of goods sold and cost of ending inventory on September 30, 20-2 under weighted average cost method:
Step 1: Calculate the weighted-average cost.
Step 2: Calculate the amount of ending inventory.
Step 3: Calculate the amount of cost of goods sold.
Therefore, the cost of sold and cost of ending inventory under weighted average cost method (Periodic inventory system) is $60,475 and $16,225.
2.
(a)
Calculate the cost of ending inventory under FIFO method (Lower of cost or market).
Explanation of Solution
Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value or at is historical cost price, whichever is less.
First-in-First-Out (FIFO): In First-in-First-Out method, the first purchased items are sold first. The value of the ending inventory consists of the recently purchased items.
Calculate the cost of ending inventory under FIFO (Lower of cost or market):
Particulars |
FIFO Cost (A) |
Market Cost (B) |
LCM Valuation (C = A or B ) Whichever is lesser |
Ending inventory under FIFO | $20,750 | $17,600 | $17,600 |
Table (2)
Working note:
Calculate the market cost.
Therefore, the cost of ending inventory under FIFO method (Lower of cost or market) is $17,600.
2.
(b)
Calculate the cost of ending inventory under weighted average cost method (Lower of cost or market).
Explanation of Solution
Weighted-average cost method: Under average cost method inventories are priced at the average of all available inventories. Average cost is the quotient of total cost of goods available for sale and total units available for sale.
Calculate the cost of ending inventory under weighted average cost (Lower of cost or market):
Particulars |
Weighted Average Cost (A) |
Market Cost (B) |
LCM Valuation (C = A or B ) Whichever is lesser |
Ending inventory under weighted average cost | $16,225 | $17,600 | $16,225 |
Table (3)
Working note:
Calculate the market cost.
Therefore, the cost of ending inventory under weighted average cost method (Lower of cost or market) is $16,225.
3.
(a)
Show the journal entry would be made under lower-of-cost-or-market.
Explanation of Solution
Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value or at is historical cost price, whichever is less.
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Show the journal entry would be made under lower-of-cost-or-market:
Section | Particulars | Debit ($) | Credit ($) |
(a) | Loss on write-down of inventory | 3,150 | |
Merchandise inventory | 3,150 | ||
(To record the loss on inventory) |
Table (2)
Working note:
Calculate the amount of loss on inventory.
3.
(b)
Show the journal entry would be made under lower-of-cost-or-market.
Explanation of Solution
No entry required for part b.
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Chapter 13 Solutions
COLLEGE ACCOUNTING, CHAPTERS 1-27 2T
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