Chapter 6, Problem 2PA

1.

To determine

Compute the ending inventory and cost of goods sold using the specific identification method.

Explanation of Solution

Specific identification method:

Specific identification method is a method in which the company records each item of the inventory at its original cost. Under this method, when the goods are sold, the company can easily identify the original costs at which they were purchased for. This method helps in arriving at the accurate cost of goods sold, and ending inventory.

Calculate the units of ending inventory.

Calculation of Ending Inventory
Details	Number of Units	Rate Per Unit ($)	Total Cost ($)
Beginning balance	20
Less: Sales - March 5	(15)
Balance	5
Less: Sales - March 27	(4)
Balance	1	250	250
Purchases:
March 9	10
Less: Sales - March 17	(8)
Balance	2	270	540
March 22	10
Less: Sales - March 27	(8)
Balance	2	280	560
March 30	9	300	2,700
Ending Inventory	14		4,050

Table (1)

Therefore, the cost of Ending Inventory in specific identification method is $4,050.

Calculate the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate Per Unit ($)	Total Cost ($)
March 5: Beginning balance	15	250	3,750
March 17: March 9 Purchase	8	270	2,160
March 27:
Beginning Inventory	4	250	1,000
March 22 Purchase	8	280	2,240
Cost of Goods Sold	35		9,150

Table (2)

Therefore, the Cost of Goods Sold in specific identification method is $9,150.

2.

To determine

Compute the ending inventory and cost of goods sold using the FIFO method.

Explanation of Solution

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

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	20	250	5,000
Add: Purchases
March 9	10	270	2,700
March 22	10	280	2,800
March 30	9	300	2,700
Total Goods available for Sale	49		13,200

Table (3)

Calculate the units of ending inventory.

Calculation of Ending Inventory (Units)
Details	Number of Units	Number of Units
Beginning balance	20
Add: Purchases
March 9	10
March 22	10
March 30	9
Total Goods available for Sale		49
Less: Sales
March 5	15
March 17	8
March 27	12
Total Sales		(35)
Ending Inventory		14

Table (4)

Calculate the cost of ending inventory.

The ending inventory is 14 units.

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
March 30	9	300	2,700
March 22	5	280	1,400
Ending Inventory	14		4,100

Table (5)

In FIFO method the ending inventory comprises of the inventory purchased last, because the inventory purchased first were sold first.

Therefore, the cost of Ending Inventory in the FIFO is $4,100.

Cost of Goods Sold.

35 units are sold.

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Inventory	20	250	5,000
March 9 Purchase	10	270	2,700
March 22 Purchase	5	280	1,400
Cost of Goods Sold	35		9,100

Table (6)

As it is FIFO method the earlier purchased items will sell first.

Therefore, the Cost of Goods Sold in the FIFO Method is $9,100

3.

To determine

Compute the ending inventory and cost of goods sold using the LIFO method.

Explanation of Solution

Last-in-Last-Out:

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

Ending Inventory:

Calculate the cost of ending inventory.

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Inventory	14	250	3,500
Ending Inventory	14	250	3,500

Table (7)

• The ending inventory is 14 units (Refer to Table 4).
• In LIFO method, the ending inventory comprises of the inventory purchased first, because the inventory purchased last were sold first.
• Therefore, the ending inventory of 14 units is from the beginning inventory.

Therefore, the cost of Ending Inventory in the LIFO method is $3,500.

Cost of Goods Sold:

Details	Number of Units	Rate per unit ($)	Total Cost ($)
March 30Purchase	9	300	2,700
March 22 Purchase	10	280	2,800
March 9 Purchase	10	270	2,700
Beginning Inventory	6	250	1,500
Cost of Goods Sold	35		9,700

Table (8)

• 35 units are sold (Refer to Table 4).
• As it is LIFO method the recent purchased items will sell first.
• Hence, the cost of goods sold will be the recent purchased items.

Therefore, the Cost of Goods Sold in the LIFO Method is $9,700.

4.

To determine

Compute the ending inventory and cost of goods sold using the Weighted-average method.

Explanation of Solution

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Calculate the Weighted-average cost.

Total cost of goods available for sale = $13,200 (Refer to table - 3)

Total units of goods available for sale = 49 units (Refer to table - 3)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$13,200}{\text{49 Units}}\\ =\$269.3878\end{array}$ (1)

Calculate the amount of Ending Inventory.

Weighted- average cost per unit = $269.3878 (1)

Number of units in ending inventory = 14 units (Refer to table - 4)

$\begin{array}{c}\text{Cost of Ending inventory}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Number of units in}\\ \text{Ending inventory}\end{array}\right)\\ \times \text{Weighted-average cost per unit}\end{array}\right)\\ =14\text{ units }\times \text{ \$269}\text{.3878}\\ =\text{\$3,771}\text{.43}\end{array}$ (2)

Therefore, the cost of Ending Inventory in the Weighted-average-cost Method is $3,771.43.

Calculate the Cost of Goods Sold.

Weighted- average cost per unit= $269.3878 (1)

Units sold = 35 units

$\begin{array}{c}\text{Cost of Goods Sold}=\left(\begin{array}{l}\text{Number of units Sold }\\ \times \text{Weighted-average cost per unit}\end{array}\right)\\ =35\text{ units}\times \text{\$269}\text{.3878}\\ =\text{\$9,428}\text{.57}\end{array}$ (3)

Therefore, the Cost of goods sold in the Weighted-average-cost Method is $9,428.57.

5.

To determine

Compute the sales revenue and gross profit each of the four methods.

Explanation of Solution

Compute the sales revenue and gross profit each of the four methods:

Figure (1)

6.

To determine

Explain whether FIFO or LIFO provides the more meaningful measure of ending inventory by comparing the both.

Explanation of Solution

Comparison of the ending inventory in FIFO and LIFO:

• The ending inventory computed using the FIFO method is $4,100.
• The ending inventory computed using the LIFO method is $3,500.
• The current cost of the ending inventory is $4,200$\left(14\text{ Units }\times \text{ \$300}\right)$.
• Hence, as the ending inventory computed in FIFO method shows approximately the current cost of the inventory, FIFO method provides more meaningful measure of ending inventory.

7.

To determine

Record the LIFO adjustment, if G Bicycle Shop chooses to report inventory using LIFO instead of FIFO.

Explanation of Solution

Record the LIFO adjustment:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold (E–)		600
	Inventory (A–)			600
	(To record the LIFO adjustment)

Table (8)

Working Note:

Ending inventory valued in FIFO	$4,100
Less: Ending inventory valued in LIFO	$3,500
LIFO Adjustment	$600

Table (9)

• Cost of Goods Sold is expense and increased which will decrease the equity. Therefore, debit the cost of goods sold account with $600.
• Merchandised inventory is an asset and decreased. Therefore, credit the merchandised inventory account with $600.