Question

Gladstone Company tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, 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
Beginning inventory, January 1			1,600		$	40
Transactions during the year:
a.	Purchase, January 30		3,650			54
b.	Sale, March 14 ($100 each)		(2,000	)
c.	Purchase, May 1		2,350			70
d.	Sale, August 31 ($100 each)		(2,500	)

Assuming that for Specific identification method (item 1d) the March 14 sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31 was selected from the remainder of the beginning inventory, with the balance from the purchase of May 1.

Required:

1. Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods: (Round intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

1. 2-a. Of the four methods, which will result in the highest gross profit?

• Last-in, first-out

• Weighted average cost

• First-in, first-out

• Specific identification

1. 2-b. Of the four methods, which will result in the lowest income taxes?

• Last-in, first-out

• Weighted average cost

• First-in, first-out

• Specific identification

Answer 1

	Last-in, first-out	Weighted average cost	First-in, first-out	Specific identification
Amount of goods available for sale	$              425,600.00	$                                  425,600.00	$                    425,600.00	$                          425,600.00
Less Cost of Ending Inventory	$              145,000.00	$                                  173,600.00	$                    205,000.00	$                          177,800.00
Cost of Goods Sold	$              280,600.00	$                                  252,000.00	$                    220,600.00	$                          247,800.00

Workings

	QTY	Rate	Amount
Beginning inventory, January 1	1600	40	$                      64,000.00
Purchase, January 30	3,650	54	$                    197,100.00
Purchase, May 1	2,350	70	$                    164,500.00
Total QTY	7600
Less Units Sold	4500
Ending Inventory Units	3100
Amount of goods available for sale			$                    425,600.00
Last-in, first-out
Beginning inventory, January 1	1,600	40	$                      64,000.00
Purchase, January 30	1,500	54	$                      81,000.00
	3100
Cost of Ending Inventory			$                    145,000.00
Weighted average cost
Weighted average Rate Per unit =$425600/4500	56.00
Cost of Ending Inventory=3100 units *46	$              173,600.00
First-in, first-out
Purchase, May 1	2,350	70	$                    164,500.00
Purchase, January 30	750	54	$                      40,500.00
	3100
Cost of Ending Inventory			$                    205,000.00
Specific identification
Beginning inventory   (2000*2/5)	800	40	$                      32,000.00
Purchase, January 30 (2000*3/5)	1200	54	$                      64,800.00
Beginning inventory remainder (1600-800)	800	40	$                      32,000.00
Purchase, May 1	1700	70	$                    119,000.00
Cost of Goods sold			$                    247,800.00

1. 2-a. Of the four methods, which will result in the highest gross profit?

First-in, first-out

Because of lower cost of Goods sold

1. 2-b. Of the four methods, which will result in the lowest income taxes?

Last-in, first-out

Because of higher cost of Goods sold lower net income hence tax will be less