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E7-5 Calculating Ending Inventory and Cost of Goods Sold Under FIFO, LIFO, and Average Cost LO7-2...

E7-5 Calculating Ending Inventory and Cost of Goods Sold Under FIFO, LIFO, and Average Cost LO7-2

Penn Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 1:

	Units	Unit Cost
Inventory, December 31, prior year	1,850		$	4
For the current year:
Purchase, March 21	5,040			6
Purchase, August 1	2,870			7
Inventory, December 31, current year	4,170

Required:

Compute ending inventory and cost of goods sold for the current year under FIFO, LIFO, and average cost inventory costing methods. (Round "Average cost per unit" to 2 decimal places and final answers to nearest whole dollar amount.)

Expert Solution

Number of units sold in the current year= 1850+5040+2870-4170= 5590 units

FIFO periodic:

Under FIFO method in periodic inventory, the units purchased first (as on the end of the year) are sold first.

Cost of goods sold is computed(as sold in the chronological order as numbered) as follows:

1850 units of $4 each= $7400
3740 units(5590-1850) of $6 each= $22440

Total cost of goods sold= 7400+22440= $29840

The closing inventory will now contain 1300 units(5040-3740) of $6 each and 2870 units of $7 each.

Closing inventory= (1300*6)+(2870*7)= $27890

LIFO periodic:

Under LIFO method in periodic inventory, the units purchased last (as on the end of the year) are sold first.

Cost of goods sold is computed as below in the order that they are sold:

2870 units of $7 each= $20090
2720 units (5590-2870) of $6 each= $16320

Total cost of goods sold= 20090+ 16320= $36410

Now, the closing inventory will contain 2320 units (5040-2720) of $6 each and 1850 units of $4 each.

Closing inventory= (2320*6)+ (1850*4)= $21320

Average cost periodic:

Under this method, we have to compute the average cost per unit using the following formula for the entire class of inventory. The date of purchase or sale does not matter in periodic inventory method.

Weighted average cost of inventory= total cost of inventory/ total units in inventory

= [(1850*4)+(5040*6)+(2870*7)] / (1850+5040+2870)

= 57730/9760= $5.91 per unit

Now, to compute the cost of goods sold we only need to multiply the weighted average cost by the units sold.

Cost of goods sold= 5.91*5590= $33037

Closing Inventory can be found by multiplying the weighted average cost by the units in closing inventory

Closing Inventory= 5.91*4170= $24645

ekkarill92 answered 2 months ago

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