Chapter 13, Problem 7SPB

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. 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:
   1. (a) FIFO
   2. (b) LIFO
   3. (c) Weighted-average (round calculations to two decimal places)
2. 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:
   1. (a) FIFO lower-of-cost-or-market
   2. (b) Weighted-average lower-of-cost-or-market
3. 3. Prepare required entries to apply:
   1. (a) FIFO lower-of-cost-or-market
   2. (b) Weighted-average lower-of-cost-or-market

To determine

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)

Conclusion

Therefore, the cost of sold and cost of ending inventory under FIFO (Periodic inventory system) is $55,950 and $20,750.

To determine

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)

Conclusion

Therefore, the cost of sold and cost of ending inventory under LIFO (Periodic inventory system) is $64,300 and $12,400.

To determine

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.

$\text{Weighted average cost}=\frac{\text{Total cost of goods available for sale}}{\text{Total number of units available for sale}}$

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.

  $\begin{array}{c}\text{Weighted-average Cost}=\left(\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\right)\\ =\frac{\$76,700}{5,200}\\ =\$14.75\end{array}$   

Step 2: Calculate the amount of ending inventory.

  $\begin{array}{c}\text{Cost of Ending inventory = }\left(\begin{array}{l}\text{Number of units in Ending inventory }\\ \times \text{ Weighted-average cost per unit}\end{array}\right)\\ =1,100\text{ units }\times \text{ \$14}\text{.75}\\ \text{=}\text{\$16,225}\end{array}$   

Step 3: Calculate the amount of cost of goods sold.

  $\begin{array}{c}\text{Cost of goods sold = }\left(\begin{array}{l}\text{Total cost of goods available for sale}\\ -\text{ Ending inventory}\end{array}\right)\\ \text{=}\text{\$76,700}-\$16,225\\ =\$60,475\end{array}$

Conclusion

Therefore, the cost of sold and cost of ending inventory under weighted average cost method (Periodic inventory system) is $60,475 and $16,225.

To determine

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.

$\begin{array}{c}\text{Market cost = }\left(\begin{array}{l}\text{Number of units in Ending inventory }\\ \times \text{ Market price per unit}\end{array}\right)\\ =1,100\text{ units}\times \text{\$16}\\ \text{=}\text{\$17,600}\end{array}$

Conclusion

Therefore, the cost of ending inventory under FIFO method (Lower of cost or market) is $17,600.

To determine

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.

$\text{Weighted average cost}=\frac{\text{Total cost of goods available for sale}}{\text{Total number of units available for sale}}$

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.

$\begin{array}{c}\text{Market cost = }\left(\begin{array}{l}\text{Number of units in Ending inventory }\\ \times \text{ Market price per unit}\end{array}\right)\\ =1,100\text{ units}\times \text{\$16}\\ \text{=}\text{\$17,600}\end{array}$

Conclusion

Therefore, the cost of ending inventory under weighted average cost method (Lower of cost or market) is $16,225.

To determine

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.

$\begin{array}{c}\text{Loss on inventory = }\left(\begin{array}{l}\text{Total cost of ending inventory }\\ -\text{ Market cost}\end{array}\right)\\ =\$20,750-\$17,600\\ \text{=}\text{\$3,150}\end{array}$

To determine

Show the journal entry would be made under lower-of-cost-or-market.

Explanation of Solution

No entry required for part b.