Question

Kingston Company starts the business in Year 1. Kingston uses FIFO as their inventory costing method. They purchase inventory as follows:

8/5/Year1: 1000 units at $30 each
11/6/Year1: 3000 units at $36 each

Assume Kingston signs a sales contract for 3,800 units for $380,000 ($100 each) on 11/1/Year1. This is the only sale for the year. The customer is within a 30-mile delivery radius (Goods are delivered by a van.)

1. Assume the items are delivered on 11/15/Year1. The customer pays in full on 11/15. What will Kingston report as the cost of goods sold for Year1? _______

2. Assume the facts in part 1. The estimated selling price of the units is $102 each as of 12/31/Year1. At what dollar amount will Kingston report the inventory on the 12/31/Year1 balance sheet? _______

3. Assume the items are delivered on 11/15/Year1. The customer paid Kingston $380,000 as follow:
---20,000 advance payment on 11/10/Year1
---180,000 payment on 12/20/Year1
---180,000 payment on 1/5/Year2
How much sales revenue (not gross margin) does Kingston report in Year1? _________

4. Assume the items are delivered on 1/5/Year2. The customer paid Kingston $380,000 as follow:
---20,000 advance payment on 11/10/Year1
---180,000 payment on 12/20/Year1
---180,000 payment on 1/5/Year2
How much sales revenue (not gross margin) does Kingston report in Year1? _____________

Answer 1

Given, Inventories in year 1:

• 8/5/Year1: 1000 units at $30 each
• 11/6/Year1: 3000 units at $36 each
• Sales 3800 units @$100 each

Ans 1

Cost of goods sold for Year 1:

• Closing Inventory under FIFO method, the first in-first out method, where you assume that the first items to enter the inventory are the first ones to be used.

Full inventory of 8/5 will be used as that was the first inventory which came in.

1000units * 30= $30,000

From 11/6 inventory will be the rest over units (3800-1000)

2800units * 36= $100800

Therefore, Cost of goods sold for year 1 will be 30000+100800= $130,800

Ans 2

As per the Accounting standards inventory is valued at Cost or Market value whichever is lower.

So, the closing inventory under FIFO in year one is

• 200 units from the 2^nd lot of inventory, which is 3000-2800units
• Cost of inventory = 200 *36= $7200
• Market Value of Inventory= 200*102= $20400
• Inventory Value to be carried is Cost or Market value whichever is lower

Therefore the ans would be $7200

Ans 3

As per the accounting standards sales revenue should be recognized when the risk and rewards of the good are transferred by the seller to the buyer and the amount is certain of the sales.

Assuming the items are delivered on 11/15/Year1, the Sales Revenue to be recognized would be full sale amount that is $380,000 irrespective of the dates when payments are received, as the goods are delivered on 11/15/year1 itself and amount is also certain $380,000.

Therefore the ans. Will be $380,000 to be recognized as revenue in year1.

Ans 4

Here the condition of transfer of goods has not met. Therefore no revenue should be recognized in year1.

In year 2 all the sale value will be recognized.

In year 1, the advance payments will be shown as current liabilities on the balance sheet.