Chapter 6, Problem 6.5AP

1.

To determine

To calculate: The ending inventory and the cost of goods sold using FIFO.

Explanation of Solution

Perpetual Inventory System:

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases, and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

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.

Ending Inventory: It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

• Calculate the cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
March, 12	40	16	640
September, 17	60	9	540
Ending Inventory (1)	100		1,180

Table (1)

Notes:

• The ending inventory is 100 units.
• FIFO method, the cost of first acquired items is assigned to sales first.
• Therefore, the ending inventory of 100 units from January 1^st purchases.

Working notes:

Calculate the units of ending inventory:

$\begin{array}{c}\text{Ending inventory units = Total goods available for sale – sales}\\ \text{=270 Units – 170Units}\\ \text{= 100Units}\end{array}$ (1)

Therefore, the cost of Ending Inventory in the FIFO is $1,180.

• Calculate the Cost of Goods Sold:

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Determine the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per unit ($)	Total Cost ($)
Beginning balance	120	21	2,520
Add:
Purchases  on March 12	50	16	800
Cost of Goods Sold	170		3,320

Table (2)

Notes:

• 170 units are sold.
• As it is FIFO method the cost of first acquired items is assigned to sales first.
• Hence, the cost of goods sold will be the first acquired items.

Therefore, the cost of goods sold in the FIFO Method is $3,320.

2.

To determine

To calculate: The ending inventory and the cost of goods sold using LIFO.

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: It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

• Calculate the cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Inventory	100	21	2,100
Ending Inventory	100		2,100

Table (3)

Notes:

• The ending inventory is 100 units (Refer to Table 2).
• In LIFO method the ending inventory comprises of the inventory purchased first, because the inventory purchased last were sold first.

Therefore, the cost of ending inventory in the LIFO method is $2,100.

• Calculate the Cost of Goods Sold:

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Determine the cost of goods sold:

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per unit ($)	Total Cost ($)
September 17	60	9	540
March 12	90	16	1,440
January 1	20	21	420
Cost of Goods Sold	170		2,400

Table (4)

Notes:

• 20 units from the beginning inventory at the rate of $21 per unit, and
• 90 units from March 12^th purchase at the rate of $16 per unit.
• 60 units from September 17^th purchase at the rate of $9 per unit.

Therefore, the cost of goods sold in the FIFO Method is $2,400.

3.

To determine

1. a. To determine: The amount of ending inventory to report using lower of cost and net realizable value under FIFO, and also record the adjusting entry.

Explanation of Solution

Lower-of-cost-or-market value:

The lower-of-cost-or-market value is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value (net realizable value) or at its historical cost price, whichever is less.

Compute the amount of ending inventory using lower-of-cost-or-market value method:

Computation of Ending Inventory – Lower-of-cost-or-market Value Method
Inventories	Quantity (Units)	Rate Per Unit($)		Total Cost($)		LCM ($)
		Cost Price ($)	Market Price ($)	Cost Price ($)	Market Price ($)
FIFO:
March, 12	40	16		640
March, 17	60	9		9
Total	100			1,180	500	500

Table (5)

Therefore, the amount of ending inventory in LCM is $500

Note:

$\begin{array}{l}\text{Total Cost Price}=\text{ Number of Units}\times \text{Cost per Unit}\\ \text{Total Market Cost}=\text{Number of Units}\times \text{Market price per Unit}\end{array}$

Compute the amount of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=}\left(\begin{array}{l}\text{Ending Inventory price }\\ \text{of FIFO}-\text{Market price}\end{array}\right)\\ \text{=\$1,180}-\text{\$500}\\ \text{=\$680}\end{array}$ (1)

Record the cost of goods sold:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold (1)		680
	Merchandised Inventory			680
	(To record the cost of goods sold)

Table (6)

• Cost of goods sold is an expense and increased which has decreased the equity by $680. Therefore, debit cost of goods sold account with $680.
• Merchandised inventory is an asset and decreased by $680. Therefore, credit the merchandised inventory account with $680.

To determine

1. b. To determine: The amount of ending inventory to report using lower of cost and net realizable value under LIFO, and also record the adjusting entry.

Explanation of Solution

Lower-of-cost-or-market value:

The lower-of-cost-or-market value is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value (net realizable value) or at its historical cost price, whichever is less.

Compute the amount of ending inventory using lower-of-cost-or-market value method:

Computation of Ending Inventory – Lower-of-cost-or-market Value Method
Inventories	Quantity (Units)	Rate Per Unit($)		Total Cost($)		LCM ($)
		Cost Price ($)	Market Price ($)	Cost Price ($)	Market Price ($)
FIFO:
January, 1	100	21		2,100
Total	100			2,100	500	1,600

Table (5)

Therefore, the amount of ending inventory in LCM is $500

Note:

$\begin{array}{l}\text{Total Cost Price}=\text{ Number of Units}\times \text{Cost per Unit}\\ \text{Total Market Cost}=\text{Number of Units}\times \text{Market price per Unit}\end{array}$

Compute the amount of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=}\left(\begin{array}{l}\text{Ending Inventory price }\\ \text{of FIFO}-\text{Market price}\end{array}\right)\\ \text{=\$2,100}-\text{\$500}\\ \text{=\$1,600}\end{array}$ (2)

Record the cost of goods sold:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold (2)		1,600
	Merchandised Inventory			1,600
	(To record the cost of goods sold)

Table (6)

• Cost of goods sold is an expense and increased which has decreased the equity by $1,600. Therefore, debit cost of goods sold account with $1,600.