Question

Scoresby Inc. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, 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
a. Inventory, Beginning		4,000		$	20
For the year:
b. Purchase, March 5		10,000			21
c. Purchase, September 19		6,000			23
d. Sale, April 15 (sold for $65 per unit)		4,400
e. Sale, October 31 (sold for $68 per unit)		9,000
f. Operating expenses (excluding income tax expense), $610,000

  

Required:

1. Calculate the number and cost of goods available for sale.

2. Calculate the number of units in ending inventory.

3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost.

4. Prepare an income statement that shows the FIFO method, LIFO method and weighted average method.

6. Which inventory costing method minimizes income taxes?

Answer 1

(1) Number and cost of goods available for sale:-

	# of units	Cost pu	Cost of Goods Available for Sale
Beginning Inventory	4000	20	80000
Purchase, 5 March	10000	21	210000
Purchase, Sep 19	6000	23	138000
	20000		428000

(2) No of Units in Ending Inventory :-

Total Goods available for sale – Units Sold

20000 units – 13400 units = 6600 Units

(3a) Periodic FIFO :-

FIFO	Cost of Goods Available for Sale			Cost of Goods Sold-Periodic FIFO			Ending Inventory-Periodic FIFO
	# of units	Cost pu	Cost of Goods Available for Sale	# of units	Cost pu	Cost of Goods Sold-Periodic FIFO	# of units	Cost pu	Ending Inventory-Periodic FIFO
Beginning Inventory	4000	20	80000	4000	20	80000	-		-
Purchases:-
March 5	10000	21	210000	9400	21	197400	600	21	12600
Sep 19	6000	23	138000				6000	23	138000
Total	20000		428000	13400		277400	6600		150600

(3b) Periodic LIFO :-

LIFO	Cost of Goods Available for Sale			Cost of Goods Sold-Periodic LIFO			Ending Inventory-Periodic LIFO
	# of units	Cost pu	Cost of Goods Available for Sale	# of units	Cost pu	Cost of Goods Sold-Periodic LIFO	# of units	Cost pu	Ending Inventory-Periodic LIFO
Beginning Inventory	4000	20	80000				4000	20	80000
Purchases:-
March 5	10000	21	210000	7400	21	155400	2600	21	54600
Sep 19	6000	23	138000	6000	23	138000
Total	20000		428000	13400		293400	6600		134600

(3c) Weighted Average cost :-

Average cost	Cost of Goods Available for Sale			Cost of Goods Sold			Ending Inventory
	# of units	Cost pu	Cost of Goods Available for Sale	# of units	Cost pu	Cost of Goods Sold	# of units	Cost pu	Ending Inventory
Beginning Inventory	4000	20	80000	13400       21.40         286760			6600          21.40                 141240
Purchases:-
March 5	10000	21	210000
Sep 19	6000	23	138000
Total	20000		428000	13400		286760	6600		141240

Avg cost per unit = Total cost available for sale/No of units available for sale

     = 428000/20000 = 21.40

(4) Income Statement :-

	FIFO	LIFO	Weighted Avg
Sales (65 * 4400) + (68 * 9000)	898000	898000	898000
(-) Cost of Goods Sold	277400	293400	286760
Gross Profit	620600	604600	611240
(-) Operating Exp	610000	610000	610000
Net Income (Loss)	10600	(5400)	1240

(6) In LIFO Method, there is a loss.

Hence Income Tax is minimize in LIFO method