Chapter 7, Problem 5PB

Pappa’s Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the year, 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 ($)
C55	3	1,070	3,210
	1	1,060	1,060
D11	6	675	4,050
	5	666	3,330
F32	1	280	280
	1	260	260
H29	4	317	1,268
K47	6	542	3,252
	2	549	1,098
S33	2	232	464
X74	7	39	273
Total			18,545

Conclusion

Hence, the ending inventory under First in First out Method is $18,545.

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 ($)
C55	3	1,040	3,210
	1	1,054	1,054
D11	9	639	5,751
	2	645	1,290
F32	2	240	480
H29	4	305	1,220
K47	6	520	3,120
	2	531	1,062
S33	2	222	444
X74	4	35	140
	3	36	108
Total			17,789

Conclusion

Hence, the ending inventory under Last in First out Method is $17,789.

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 ($)
C55	4	1,056 (1)	4,224
D11	11	654 (2)	7,194
F32	2	252 (3)	504
H29	4	311 (4)	1,244
K47	8	534 (5)	4,272
S33	2	227 (6)	454
X74	7	37 (7)	259
			18,151

Working note 1:

Computation of unit cost for Model C55:

$\begin{array}{c}C55=\frac{\left[\left(3\times \$1,040\right)+\left(3\times \$1,054\right)+\left(3\times \$1,060\right)+\left(3\times \$1,070\right)\right]}{\left(3+3+3+3\right)}\\ =\frac{\$12,672}{12}\\ =\$1,056\end{array}$

Working note 2:

Computation of unit cost for Model D11:

$\begin{array}{c}D11=\frac{\left[\left(9\times \$639\right)+\left(7\times \$645\right)+\left(6\times \$666\right)+\left(6\times \$675\right)\right]}{\left(9+7+6+6\right)}\\ =\frac{\$18,312}{28}\\ =\$654\end{array}$

Working note 3:

Computation of unit cost for Model F32:

$\begin{array}{c}F32=\frac{\left[\left(5\times \$240\right)+\left(3\times \$260\right)+\left(1\times \$260\right)+\left(1\times \$280\right)\right]}{\left(5+3+1+1\right)}\\ =\frac{\$2,520}{10}\\ =\$252\end{array}$

Working note 4:

Computation of unit cost for Model H29:

$\begin{array}{c}H29=\frac{\left[\left(6\times \$305\right)+\left(3\times \$310\right)+\left(3\times \$316\right)+\left(4\times \$317\right)\right]}{\left(6+3+3+4\right)}\\ =\frac{\$4,976}{16}\\ =\$311\end{array}$

Working note 5:

Computation of unit cost for Model K47:

$\begin{array}{c}K47=\frac{\left[\left(6\times \$520\right)+\left(8\times \$531\right)+\left(4\times \$549\right)+\left(6\times \$542\right)\right]}{\left(6+8+4+6\right)}\\ =\frac{\$12,816}{24}\\ =\$534\end{array}$

Working note 6:

Computation of unit cost for Model S33:

$\begin{array}{c}S33=\frac{\left[\left(4\times \$222\right)+\left(4\times \$232\right)\right]}{\left(4+4\right)}\\ =\frac{\$1,816}{8}\\ =\$227\end{array}$

Working note 7:

Computation of unit cost for Model X74:

$\begin{array}{c}X74=\frac{\left[\left(4\times \$35\right)+\left(6\times \$36\right)+\left(8\times \$37\right)+\left(7\times \$39\right)\right]}{\left(4+6+8+7\right)}\\ =\frac{\$925}{25}\\ =\$37\end{array}$

Conclusion

Hence, the ending inventory under weighted average cost Method is $18,151.

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.