Chapter 7, Problem 5PA

Dymac Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the next 12 months, and the inventory count at December 31 are summarized as follows:

Instructions

1. 1. Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings:

If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase.

1. 2. Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1).
2. 3. Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1).
3. 4. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.

To determine

Determine the value of inventory 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 tabular column showing inventory cost is presented as follows:

Model	Quantity ($)	Unit cost ($)	Total cost ($)
A10	4	76	304
	2	70	140
B15	6	184	1,104
	2	170	340
E60	5	70	350
G83	9	259	2,331
J34	15	270	4,050
M90	3	130	390
	2	128	256
Q70	7	180	1,260
	1	175	175
Total			10,700

Conclusion

Hence, the ending inventory under First in First out Method is $10,700.

To determine

Determine the value of inventory using last in first out method under periodic inventory system.

Explanation of Solution

The tabular column showing inventory cost is presented as follows:

Model	Quantity ($)	Unit cost ($)	Total cost ($)
A10	4	64	256
	2	70	140
B15	8	176	1,408
E60	3	75	225
	1	65	130
G83	7	242	1,694
	2	250	500
J34	12	240	2,880
	3	246	738
M90	2	108	216
	2	110	220
	1	128	128
Q70	5	160	800
	3	170	510
Total			9,845

Conclusion

Hence, the ending inventory under Last in First out Method is $9,845.

To determine

Determine the value of inventory using weighted average method under periodic inventory system.

Explanation of Solution

The tabular column showing inventory cost is presented as follows:

Model	Quantity ($)	Unit cost ($)	Total cost ($)
A10	6	70 (1)	256
B15	8	174 (2)	1,392
E60	5	69 (3)	345
G83	9	253 (4)	2,277
J34	15	258 (5)	3,870
M90	5	121 (6)	605
Q70	8	172 (7)	1,376
			10,285

Working note 1:

Computation of unit cost for Model A10:

$\begin{array}{c}A10=\frac{\left[\left(4\times \$64\right)+\left(4\times \$70\right)+\left(4\times \$76\right)\right]}{\left(4+4+4\right)}\\ =\frac{\$840}{12}\\ =\$70\end{array}$

Working note 2:

Computation of unit cost for Model B15:

$\begin{array}{c}B15=\frac{\left[\left(8\times \$176\right)+\left(4\times \$158\right)+\left(3\times \$170\right)+\left(6\times \$184\right)\right]}{\left(8+4+3+6\right)}\\ =\frac{\$3,654}{21}\\ =\$174\end{array}$

Working note 3:

Computation of unit cost for Model E60:

$\begin{array}{c}E60=\frac{\left[\left(3\times \$75\right)+\left(3\times \$65\right)+\left(15\times \$68\right)+\left(9\times \$70\right)\right]}{\left(3+3+15+9\right)}\\ =\frac{\$2,070}{30}\\ =\$69\end{array}$

Working note 4:

Computation of unit cost for Model G83:

$\begin{array}{c}G83=\frac{\left[\left(7\times \$242\right)+\left(6\times \$250\right)+\left(5\times \$260\right)+\left(10\times \$259\right)\right]}{\left(7+6+5+10\right)}\\ =\frac{\$7,084}{28}\\ =\$253\end{array}$

Working note 5:

Computation of unit cost for Model J34:

$\begin{array}{c}J34=\frac{\left[\left(3\times \$75\right)+\left(3\times \$65\right)+\left(15\times \$68\right)+\left(9\times \$70\right)\right]}{\left(12+10+16+16\right)}\\ =\frac{\$13,932}{54}\\ =\$258\end{array}$

Working note 6:

Computation of unit cost for Model M90:

$\begin{array}{c}M90=\frac{\left[\left(2\times \$108\right)+\left(2\times \$110\right)+\left(3\times \$128\right)+\left(3\times \$130\right)\right]}{\left(2+2+3+3\right)}\\ =\frac{\$1,210}{10}\\ =\$121\end{array}$

Working note 7:

Computation of unit cost for Model Q70:

$\begin{array}{c}Q70=\frac{\left[\left(5\times \$160\right)+\left(4\times \$170\right)+\left(4\times \$175\right)+\left(7\times \$180\right)\right]}{\left(5+4+4+7\right)}\\ =\frac{\$3,440}{20}\\ =\$69\end{array}$

Conclusion

Hence, the ending inventory under weighted average cost Method is $10,285.

To determine

Discuss the method that would be preferred for income tax purposes in the period of rising prices.

Explanation of Solution

During the period of rising prices, the last in first out method will result in lower cost of inventory, the cost of merchandise sold will be higher, and net income would be lower than other two methods. Therefore, the LIFO method would be preferred for the current year because it would effect in lower income tax.

To determine

Discuss the method that would be preferred for income tax purposes in the period of declining prices.

Explanation of Solution

During the period of declining prices, the first in first out method (FIFO) will result in lower cost of inventory, the cost of merchandise sold will be higher, and net income would be lower than other two methods. Therefore, the FIFO method would be preferred for the current year because it would effect in lower income tax.