Question

Scoresby Inc. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31. Transactions Units Unit Cost a. Inventory, Beginning 4,000 $ 20 For the year: b. Purchase, March 5 10,000 21 c. Purchase, September 19 6,000 23 d. Sale, April 15 (sold for $65 per unit) 4,500 e. Sale, October 31 (sold for $68 per unit) 9,000 f. Operating expenses (excluding income tax expense), $615,000 Required: 1. Calculate the number and cost of goods available for sale. 2. Calculate the number of units in ending inventory. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost. 4. Prepare an income statement that shows the FIFO method, LIFO method and weighted average method. 6. Which inventory costing method minimizes income taxes

Answer 1

Answer:

                       Transactions        Units        Unit Cost   Total Cost

a. Inventory, Beginning               4,000             $ 20      80,000

b. Purchase, March 5                  10,000              21        210,000

c. Purchase, September 19          6,000             23        138,000

d. Sale, April 15                             4,500            65         292500

e. Sale, October 31                        9,000            68        612000

f. Operating expenses  $615,000

Ending Inventory Units 6,500

Cost of Good Available for Sale = 80,000+ 210,000+ 138,000= $428,000

The number of units in ending inventory = Beginning + Purchases - Sales

                                                     =4000+ 10,000+ 6000- 4,500- 9,000

                                                     = 6500

FIFO  cost of ending inventory $ 148500

6,000 units at $ 23 =$138,000

500 units at $ 21= $ 10500

FIFO  cost of goods sold = Sales - FIFO Ending Inventory

                                      = $ 904500- $ 148500= $ 756000

LIFO  cost of ending inventory $ 132500

4,000 units at $ 20 =$80,000

2500 units at $ 21= $ 52500

LIFO  cost of goods sold = Sales - LIFO Ending Inventory

                                      = $ 904500- $ 132500= $ 772000

Weighted  cost of ending inventory = ($428,000/20,000)*6500= $ 139100

Weighted cost of goods sold = Sales - Weighted  Ending Inventory

                                              =$ 904500-$ 139100= $765400

Scoresby Inc. tracks

Income Statement

                                       FIFO                  LIFO            Weighted Method

Sales                      $ 904500            $ 904500         $ 904500

Cost OF Good       $756000            $ 772000            $765400

Sold

Gross Profit           $ 148500             $ 132500             $ 139100

Less

Operating expenses  $615,000         $615,000              $615,000

Net Loss                   (466,500)            (482,500)            (475,900)

4.LIFO minimizes taxes as it gives the lowest gross profit assigning the oldest values to ending inventory.

Answer 2

1. The number and cost of goods available for sale are 20,000 units and $428,000 respectively.

2. The number of Ending Inventory = 6,500 (20,000 - 13,500) units.

3. The computation of the cost of ending inventory and the cost of goods sold under the three methods are as follows:

                                              FIFO               LIFO        Weighted -Average

Ending inventory             $148,500        $132,500              $139,100

Cost of goods sold         $279,500        $295,500            $288,900

4. Income Statements under the three methods are as follows:

                                              FIFO               LIFO         Weighted -Average

Sales Revenue              $904,500        $904,500              $904,500

Cost of goods sold        $279,500        $295,500              $288,900

Gross profit                    $625,000       $609,000               $615,600

Operating expenses     $615,000         $615,000               $615,000

Net income                    $10,000           ($6,000)                     $600

Data and Calculations:

Transactions                                  Units           Unit Cost     Total Cost

a. Inventory, Beginning                 4,000             $ 20             $80,000

b. Purchase, March 5                  10,000                 21               210,000

c. Purchase, September 19          6,000                23               138,000

Total Units and costs of goods 20,000 units                      $428,000

Weighted-average cost per unit = $21.40 ($428,000/20,000)

                                                                     Units       Total

d. Sale, April 15       (sold for $65 per unit) 4,500    $292,500

e. Sale, October 31 (sold for $68 per unit) 9,000    $612,000

Total Sales Revenue for the year              13,500    $904,500

Ending Inventory = 6,500 (20,000 - 13,500) units

f. Operating expenses = $615,000

(a) FIFO:

Ending Inventory = $148,500 (6,000 x $23 + 500 x $21)

Cost of goods sold = $279,500 ($428,000 - $148,500)

(b) LIFO

Ending Inventory = $132,500 (4,000 x $20 + 2,500 x $21)

Cost of goods sold = $295,500 ($428,000 - $132,500)

(c) Weighted-Average Cost:

Ending Inventory = $139,100 (6,500 x $21.40)

Cost of goods sold = $288,900 (13,500 x $21.40)

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