Chapter 7, Problem 4PB

The beginning inventory for Dunne Co. and data on purchases and sales for a three-month period are shown in Problem 7-1B.

Instructions

1. 1. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the first-in, first-out method and the periodic inventory system.
2. 2. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the last-in, first-out method and the periodic inventory system.
3. 3. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the weighted average cost method and the periodic inventory system. Round the weighted average unit cost to the dollar.
4. 4. Compare the gross profit and June 30 inventories using the following column headings:

To determine

Determine the value of inventory and cost of merchandise sold using first in first out method under periodic inventory system.

Explanation of Solution

Periodic Inventory System: Periodic inventory system is a system, in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

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.

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.

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.

The value of ending inventory is calculated as follows:

$\begin{array}{c}\text{Ending Inventory}\left(\text{FIFO}\right)\text{ =}\left(\text{26 units}\times \$1,264\right)\\ =\$32,864\end{array}$

Calculate the cost of merchandise sold is as follows:

	Amount ($)
Beginning inventory, April 1	30,000
Add: Purchases                               Table (3)	313,640
Merchandise available for sale	343,640
Less: Ending inventory, June 31	32,864
Cost of merchandise sold	310,776

Table (1)

Working notes:

Calculate the units in ending inventory as follows:

	Units
Units  in beginning inventory and purchased	275
Less: Units sold	249
Units in ending inventory	26

Table (2)

Calculate the merchandise purchases as follows:

Purchases
Date	Quantity	Unit cost	Total
08-Apr	75	$1,240	$93,000
08-May	60	$1,260	$75,600
28-May	80	$1,260	$100,800
21-Jun	35	$1,264	$44,240
			$313,640

Table (3)

Conclusion

Hence, the ending inventory under First in First out Method is $32,864 and cost of merchandise sold is $310,776.

To determine

Determine value of inventory and cost of merchandise sold using last in first out method under periodic inventory system.

Explanation of Solution

The value of ending inventory is calculated as follows:

$\begin{array}{c}\text{Ending Inventory}\left(\text{LIFO}\right)\text{ =}\left(25\text{ units}\times \$1,200\right)+\left(\text{1 unit}\times \$1,240\right)\\ =\$30,000+\$1,240\\ =\$31,240\end{array}$

Calculate the cost of merchandise sold is as follows:

	Amount ($)
Beginning inventory, April 1	30,000
Add: Purchases                               Table (3)	313,640
Merchandise available for sale	343,640
Less: Ending inventory, June 31	31,240
Cost of merchandise sold	312,400

Table (4)

Conclusion

Hence, the ending inventory under Last in First out Method is $31,240 and cost of merchandise sold is $312,400.

To determine

Determine value of inventory and cost of merchandise sold using weighted average method under periodic inventory system.

Explanation of Solution

The value of ending inventory is calculated by multiplying ending inventory with weighted average cost per unit.

$\begin{array}{c}\text{Ending Inventory}\left(\text{Weighted average}\right)\text{ =}\left[11,250\text{ units}\times \$87.20\left(1\right)\right]\\ =\$981,000\end{array}$

Calculate the cost of merchandise sold is as follows:

	Amount ($)
Beginning inventory, January 1	562,500
Add: Purchases                               Table (3)	11,340,000
Merchandise available for sale	11,902,500
Less: Ending inventory, March 31	981,000
Cost of merchandise sold	10,921,500

Table (5)

Working note 1:

The weighted average unit cost is calculated as follows:

$\begin{array}{c}\text{Weighted average unit cost = }\frac{\text{Total cost of inventory available for sale}}{Total\text{ units available for sale}}\\ =\frac{\$11,902,500}{136,500}\\ =\$87.20\end{array}$

To determine

Compare gross profit and ending inventories of all the three methods.

Explanation of Solution

The table showing all the three methods of inventory is as follows:

	FIFO($)	LIFO($)	Weighted average ($)
Sales	$ 525,250	$ 525,250	$ 525,250
Less: Cost of merchandise sold	$ 310,776	$ 312,400	$ 311,140
Gross Profit	$ 214,474	$ 212,850	$ 214,110
Ending Inventory, June 31	$ 32,864	$ 31,240	$ 32,500

Table (6)

Working notes: Calculate the total sales for the three-month period:

Sales
Date	Quantity	Unit cost	Total
11-Apr	40	$2,000	$80,000
30-Apr	30	$2,000	$60,000
10-May	50	$2,000	$100,000
19-May	20	$2,000	$40,000
5-Jun	40	$2,250	$90,000
16-Jun	25	$2,250	$56,250
28-Jun	44	$2,250	$99,000
Total			$525,250

Table (7)