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Chapter 8: Question 14E (page 426)

The following is a record of Pervis Ellison Company鈥檚 transactions for Boston Teapots for the month of May 2017.

May 1 Balance 400 units @ \(20 May 10 Sale 300 units @ \)38

12 Purchase 600 units @ \(25 20 Sale 540 units @ \)38

28 Purchase 400 units @ $30

Instructions

(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO?

(b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.

Short Answer

Expert verified

Answer

The value of periodic ending inventory under FIFO and LIFO are $16,000 and $12,000, respectively. Under perpetual inventory, these figures are $16,000 and $15,500, respectively.

Step by step solution

01

Value of ending inventory under periodic method

Endinginventory(Units)=Totalunitsavailableforsale-Totalunitssold=1,400-840=560

1) Using FIFO

Date

Units

Cost per unit

Amount

May 28

400

$30

$12000

May 12

160

$25

$4000

Total

560

$16,000

The value of ending inventory by FIFO is $16,000.

2) Using LIFO

Date

Units

Cost per unit

Amount

Beginning

400

$20

$8000

May 12

160

$25

$4000

Total

560

$12,000

The value of ending inventory by FIFO is $12,000.

3) Using Weighted Average

Averagecost=TotalvalueofavailableunitsTotalavailableunits=$35,0001,400=$25

Valueofendinginventory=Averagecost脳Endinginventory=$25脳560=$14,000


02

Value of ending inventory under perpetual method

1) Using FIFO

Date

Purchase

Cost of goods sold

Balance

May 1

Beginning 400 units @ $20

$8,000

May 10

300 units @ $20

-$6,000

$2,000

May 12

600 units @ $25

$15,000

$17,000

May 20

100 units @ $20

-$2000

440 units @ 25

-$11,000

$4,000

May 28

400 units @ $30

$12,000

$16,000

The value of ending inventory amounts to $16,000.

2) Using LIFO

Date

Purchase

Cost of goods sold

Balance

May 1

Beginning 400 units @ $20

$8,000

May 10

300 units @ $20

-$6,000

$2,000

May 12

600 units @ $25

$15,000

$17,000

May 20

540 units @ $25

-$13,500

$3,500

May 28

400 units @ $30

$12,000

$15,500

The value of ending inventory amounts to $15,500.

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Most popular questions from this chapter

Prepare a memorandum containing responses to the following items.

(a) Describe the cost flow assumptions used in average-cost, FIFO, and LIFO methods of inventory valuation.

(b) Distinguish between weighted-average-cost and moving-average-cost for inventory costing purposes.

(c) Identify the effects on both the balance sheet and the income statement of using the LIFO method instead of the FIFOmethod for inventory costing purposes over a substantial time period when purchase prices of inventoriable items arerising. State why these effects take place.

Cruise Industries purchased \(10,800 of merchandise on February 1, 2017,

subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned \)2,500 (gross price before trade or cash discount)on February 4. The invoice was paid on February 13.

Instructions

(a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(b) Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(c) At what amount would the purchase on February 1 be recorded if the net method were used?

Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Units Unit Total Units Selling Total

InCostSoldPrice

Date Transaction

July 1 Balance 100 \(4.10 \) 410

6 Purchase 800 4.20 3,360

7 Sale 300\(7.00 \) 2,100

10 Sale 300 7.30 2,190

12 Purchase 400 4.50 1,800

15 Sale 200 7.40 1,480

18 Purchase 300 4.60 1,380

22 Sale 400 7.40 2,960

25 Purchase 500 4.58 2,290

30 Sale 200 7.50 1,500

Totals 2,100\(9,240 1,400\)10,230

Instructions

(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

(1) FIFO.

(2) LIFO.

(3) Weighted-average.

(b) Answer the following questions.

(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.

(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.

Case 1: T J International

T J International was founded in 1969 as Trus Joist International. The firm, a manufacturer of specialty building products, has its headquarters in Boise, Idaho. The company, through its partnership in the Trus Joist MacMillan joint venture, develops and manufactures engineered lumber. This product is a high-quality substitute for structural lumber and uses lower-grade wood and materials formerly considered waste. The company also is majority owner of the Outlook Window Partnership, which is a consortium of three wood and vinyl window manufacturers.

Following is T J International鈥檚 adapted income statement and information concerning inventories from its annual report.

T J International

Sales \(618,876,000

Cost of goods sold 475,476,000

Gross profit 143,400,000

Selling and administrative expenses 102,112,000

Income from operations 41,288,000

Other expense 24,712,000

Income before income tax 16,576,000

Income taxes 7,728,000

Net income \) 8,848,000

Inventories.Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following:

Current Year Prior Year

Finished goods \(27,512,000 \)23,830,000

Raw materials and

work-in-progress 34,363,00033,244,000

61,875,000 57,074,000

Reduction to LIFO cost (5,263,000) (3,993,000)

\(56,612,000 \)53,081,000

The last-in, first-out (LIFO) method is used for determining the cost of lumber, veneer, Microllamlumber, TJI joists, and open web joists. Approximately 35 percent of total inventories at the end of the current year were valued using the LIFO method. The first-in, first-out (FIFO) method is used to determine the cost of all other inventories.

Instructions

(a) How much would income before taxes have been if FIFO costing had been used to value all inventories?

(b) If the income tax rate is 46.6%, what would income tax have been if FIFO costing had been used to value all inventories ? In your opinion, is this difference in net income between the two methods material? Explain.

(c) Does the use of a different costing system for different types of inventory mean that there is a different physical flow of goods among the different types of inventory? Explain.

How might a company obtain a price index in order to apply dollar-value LIFO?
See all solutions

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