Question

Don Hawk Furnishings sells a variety of decorative pieces including a variety of candle holders. The business began the second quarter (April to June) of 2018 with 15 (Alanea) candle holders at a total cost of $108,750. The following transactions relating to the “Alanea” candle holders were completed during the quarter.

April 7 90 candle holders were purchased at a cost of $6,850 each. In addition the business paid freight charges of $800 cash on each candle holder to have the inventory shipped from the point of purchase to their warehouse.

April 30 The sales for April were 75 candle holders which yielded total sales revenue of $803,250. ( 15 of these units were sold on account to longstanding customers of the business)

May 6 A new batch of 80 candle holders was purchased at a total cost of $654,800

May 9 Upon inspection of the candle holders purchased on May 6, five (5) of the units were found to be defective and were returned to the supplier.

May 31 During the month 62 of the decorative pieces were sold at a price of $11,450 each.

June 5 A customer, to whom 7 of the candle holders were sold during the first business day of May, returned 3 of the candle holders, as they were of another make & model.

June 14 Owing to an increased demand, a further 110 candle holders were purchased at a cost of $9,000 each; the supplier gave a 3% quantity discount on the purchase.

June 30 116 candle holders were sold during June at a unit selling price of $12,250.

June 30 An actual count of inventory was carried out at the close of business which revealed that there were 36 pieces of the Alanea brand of merchandise in the store room. Unless otherwise stated, assume that all purchases were on account and received on the dates stated.

Required:

(A) Prepare a perpetual inventory record for this merchandise, using the first in, first out (FIFO) method of inventory valuation to determine the company’s cost of goods sold for the quarter and the value of ending.

(B) Given that selling, distribution and administrative costs associated with the Alanea brand of candle holders for the quarter were $27,255, $42,400 and $145,600 respectively, prepare an income statement for Don Hawk Furnishings (Alanea) for the quarter ended June 30, 2018.   

(C) Journalize the transactions for the month of April, assuming the company uses a:

- Periodic inventory system

- Perpetual inventory system

(D) The manager of the business, Don Hawk, has stated that his objective is to cut back on his tax liability as much as possible and is of the view that the FIFO method would be best. Do you agree with Don? Explain your answer clearly distinguishing between the first in, first out (FIFO) and last in, first out (LIFO) methods of inventory valuation.

Answer 1

1. Statement showing calculation of Perpectual inventory records using FIFO method:

Date	Purchase			Cost of Goods Sold			Inventory in hand
	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost
April 1							15	7250	108750
April 7	90	7650 (6850 + 800)	688500				15	7250	108750
							90	7650	688500
April 30				15	7250	108750	30	7650	229500
				60	7650	459000
May 6	80	8185	654800				30	7650	229500
							80	8185	654800
May 9							30	7650	229500
							75	8185	613875
May 31				30	7650	229500	43	8185	351955
				32	8185	261920
June 5				(3)	8185	(24555)	46	8185	376510
June 14	110	8130	960300				46	8185	376510
							110	8730	960300
June 30				46	8185	376510	40	8730	349200
				70	8730	611100

Conclusion: Closing Stock = 40 units @ $8730 = $349,200

Cost of goods sold = 108750 + 459000 + 229500 + 261920 - 24555 + 376510 + 611100 = $2,022,225

2. Income Statement of Don Hawk Furnishings(Alanea)

for the quarter ended June 30, 2018

Particulars	$
Sales (W.N. 1)	2,899,800
Less: Cost of Goods sold	(2,022,225)
Gross Profit	877,575
Less: Operating Expenses:
Administrative Expenses	(145,600)
Selling Expenses	(27,255)
Distribution Expenses	(42,400)
Net Profit	662,320

W. N. 1 Sales during the quarter

April 30 (75 units @ $10,710)	803,250
May 31 (62 units @ $11,450)	709,900
June 30 (116 units @ $12,250)	1,421,000
Less: Sales Returns (3 units @ $11,450)	(34,350)
	2,899,800