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Question 11E

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 426

Short Answer

John Adams Company’s record of transactions for the month of April was as follows.

Purchases Sales

April 1 (balance on hand) 600 @ $ 6.00 April 3 500 @ $10.00

4 1,500 @ 6.08 9 1,400 @ 10.00

8 800 @ 6.40 11 600 @ 11.00

13 1,200 @ 6.50 23 1,200 @ 11.00

21 700 @ 6.60 27 900 @ 12.00

29 500 @ 6.79 4,600

5,300

Instructions

(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and(2) average-cost.

(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.

(c) Compute the cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

(d) In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income?

Value of closing inventory would be highest under FIFO, and the value of COGS would be highest under LIFO.

See the step by step solution

Step by Step Solution

Value of ending inventory under the periodic system

a) Value of ending inventory using LIFO

b) Value of ending inventory using average cost

Units

Rate

Amount

Beginning Inventory

600

$6

$3600

April 4 Purchase

1,500

$6.08

$9120

April 8 Purchase

800

$6.40

$5120

April 13 Purchase

1,200

$6.50

$7800

April 21 Purchase

700

$6.60

$4620

April 29 Purchase

500

$6.79

$3395

Total

5,300

$33,655

Value of ending inventory under the perpetual system

a) Using FIFO

Date

Purchase

Cost of Goods Sold

Balance

April 1

Beginning Balance (600 units @ $6)

$3,600

April 3

500 units @ $6

-$3,000

$600

April 4

1,500 units @ $6.08

$9,120

$9,720

April 8

800 units @ $6.40

$5,120

$14,840

April 9

100 units @ $6

-$600

1300 units @ $6.08

-$7,904

$6,336

April 11

200 units @ $6.08

-$1,216

400 units @ $6.40

-$2,560

$2,560

April 13

1200 units @ $6.50

$7,800

April 21

700 units @ $6.60

$4,620

$14,980

April 23

400 units @ $6.40

-$2,560

800 units @ $6.50

-$5,200

$7,220

April 27

400 units @ $6.50

-$2,600

500 units @ $6.60

-$3,300

$1,320

April 29

500 units $6.79

$3,395

$4,715

The value of closing inventory comes out to be $4,715.

a) Using LIFO

Date

Purchase

Cost of Goods Sold

Balance

April 1

Beginning Balance (600 units @ $6)

$3,600

April 3

500 units @ $6

-$3,000

$600

April 4

1,500 units @ $6.08

$9,120

$9,720

April 8

800 units @ $6.40

$5,120

$14,840

April 9

800 units @ $6.40

-$5,120

600 units @ $6.08

-$3,648

$6,072

April 11

600 units @ $6.08

-$3,648

$2,424

April 13

1200 units @ $6.50

$7,800

April 21

700 units @ $6.60

$4,620

$14,844

April 23

700 units @ $6.60

-$4,620

500 units @ $6.50

-$3,250

$6,974

April 27

700 units @ $6.50

-$4,550

200 units @ $6.08

-$1,216

$1,208

April 29

500 units $6.79

$3,395

$4,603

The value of closing inventory comes out to be $4,603.

Value of COGS under the periodic system using FIFO

a) Value of ending inventory using FIFO

Inventory valuation method producing highest net income

The highest net income is the result of the lowest cost of goods sold. The cost of goods sold is the difference between the total available inventory and ending inventory. So, if the ending inventory is high in value, the COGS would be below. FIFO I is based on the historical cost among all the inventory valuing alternatives. Thus under this method, the value of COGS would not be affected due to inflation as inventories at the latest cost are left in the stock. So the COGS would always be lower.

Most popular questions for Business-studies Textbooks

George Solti, the controller for Garrison Lumber Company, has recently hired you as assistant controller. He wishes to determine your expertise in the area of inventory accounting and therefore asks you to answer thefollowing unrelated questions.

(a) A company is involved in the wholesaling and retailing of automobile tires for foreign cars. Most of the inventory is imported,and it is valued on the company’s records at the actual inventory cost plus freight-in. At year-end, the warehousing costs areprorated over cost of goods sold and ending inventory. Are warehousing costs considered a product cost or a period cost?

(b) A certain portion of a company’s “inventory” is composed of obsolete items. Should obsolete items that are not currentlyconsumed in the production of “goods or services to be available for sale” be classified as part of inventory?

(c) A company purchases airplanes for sale to others. However, until they are sold, the company charters and services theplanes. What is the proper way to report these airplanes in the company’s financial statements?

(d) A company wants to buy coal deposits but does not want the financing for the purchase to be reported on its financialstatements. The company therefore establishes a trust to acquire the coal deposits. The company agrees to buy the coalover a certain period of time at specified prices. The trust is able to finance the coal purchase and pay off the loan as itis paid by the company for the minerals. How should this transaction be reported?

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