Question

1. Periodic Inventory by Three Methods; Cost of Merchandise Sold

The units of an item available for sale during the year were as follows:

Jan. 1	Inventory	40 units @ $94
Mar. 10	Purchase	70 units @ $102
Aug. 30	Purchase	30 units @ $108
Dec. 12	Purchase	60 units @ $114

There are 80 units of the item in the physical inventory at December 31. The periodic inventory system is used.

Determine the inventory cost and the cost of merchandise sold by three methods. Round interim calculations to one decimal and final answers to the nearest whole dollar.

Cost of Merchandise Inventory and Cost of Merchandise Sold
Inventory Method	Merchandise Inventory	Merchandise Sold
First-in, first-out (FIFO)	$	$
Last-in, first-out (LIFO)
Weighted average cost

2.  Effect of Errors in Physical Inventory

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $418,110 instead of the correct amount of $401,390.

Enter all amounts as positive numbers.

a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

Balance Sheet Items	Overstated/Understated/ No Effect	Amount
Merchandise Inventory		$
Current Assets
Total Assets
Owner's Equity

b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

Income Statement Items	Overstated/Understated/ No Effect	Amount
Cost of Merchandise Sold		$
Gross Profit
Net Income

c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?

Income Statement Items	Understated/Overstated/ No Effect	Amount
Cost of Merchandise Sold		$
Gross Profit
Net Income

d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet? (Choose 1, 2 or 3)

1. The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
2. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.
3. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Answer 1

1

Total inventory available for sale = 40 + 70 +30 + 60 = 200 units

Ending Inventory = 80 units

Units Sold = 200 units - 80 units = 120 units

FIFO assumes that first purchased units are sold first. So ending inventory will be last purchased.

Ending Inventory of 80 units will be first from last purchase and balance from second last purchase = 60 x $114 + 20 x $108 = $9,000

Cost of goods sold will be first purchased units = 40 x $94 + 70 x $102 + 10 x $108 = $11,980

LIFO assumes that first purchased units are sold last. So ending inventory will be first purchased.

Ending Inventory of 80 units will be first from first purchase and balance from second first purchase = 40 x $94 + 40 x $102 = $7,840

Cost of goods sold will be last purchased units = 60 x $114 + 30 x $108 + 30 x $102 = $13,140

Weighted average assumes cost on basis of averge rate

Average rate rate = 40 x $94 + 70 x $102 + 30 x $108 + 60 x $114 = $20,980 / (40+70+30+60) = $104.90

Ending Inventory of 80 = 80 x $104.90 = $8,392

Cost of goods sold will be = 120 x $104.90 = $12,588

2.

Actual inventory = $401,390.

Misstated inventoy = $418,110

Overstated = $16,720

a.

Merchandise Inventory - Ovestated - $16,720

Current Assets - Ovestated - $16,720 (Since Inventory part of current asset)

Total Assets - Ovestated - $16,720 (Since Inventory part of total asset)

Owner's Equity - Understated - $16,720

b.

Cost of Merchandise Sold - Understated - $16,720 (Since closing stock value is reduced to find COGS)

Gross Profit -  Overstated - $16,720 (Since COGS is understated)

Net Income - Overrstated - $16,720 (Since Gross profit is overstated)

c.

Cost of Merchandise Sold - overerstated - $16,720 (Since openig stock value is addedd to find COGS)

Gross Profit -  understated - $16,720 (Since COGS is overstated)

Net Income - understated - $16,720 (Since Gross profit is understated)

d.

The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.