Question

Gladstone Company tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, 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
Beginning inventory, January 1			1,100		$	50
Transactions during the year:
a.	Purchase, January 30		2,150			60
b.	Sale, March 14 ($100 each)		(750	)
c.	Purchase, May 1		850			85
d.	Sale, August 31 ($100 each)		(1,200	)

Assuming that for Specific identification method (item 1d) the March 14 sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31 was selected from the remainder of the beginning inventory, with the balance from the purchase of May 1.

Required:
1.	Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods: (Round intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

         

		Amounts of good available for sale	Ending Inventory	Cost of Goods Sold
a	Last in First out
b	Weighted Average Cost
c	First in First out
d	Specific identification

2-a.	Of the four methods, which will result in the highest gross profit?
	A Last-in, first-out B Weighted average cost C First-in, first-out D Specific identification

2-b.	Of the four methods, which will result in the lowest income taxes?
	A Last-in, first-out B Weighted average cost C First-in, first-out D Specific identification

Answer 1

		Amounts of good available for sale	Ending Inventory	Cost of Goods Sold
a	Last in First out	$256250	$118000	$138250
b	Weighted Average Cost	$256250	$134375	$121875
c	First in First out	$256250	$150250	$106000
d	Specific identification	$256250	$140250	$116000

Explanations:-

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	1100	$50	$55000				1100	$50	$55000
Purchases:-
January 30	2150	$60	$129000	1100	$60	$66000	1050	$60	$63000
May 1	850	$85	$72250	850	$85	$72250
Total	4100		$256250	1950		$138250	2150		$118000

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 Available for Sale	# of units	Cost pu	Cost of Goods Available for Sale
Beginning Inventory	1100	$50	$55000	1950       $62.50     $121875			2150          $62.50             $134375
Purchases:-
January 30	2150	$60	$129000
May 1	850	$85	$72250
Total	4100		$256250	1950		$121875	2150		$134375

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

     = $256250/4100 = $62.50

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	1100	$50	$55000	1100	$50	$55000	-	6	-
Purchases:-
January 30	2150	$60	$129000	850	$60	$51000	1300	$60	$78000
May 1	850	$85	$72250				850	$85	$72250
Total	4100		$256250	1950		$106000	2150		$150250

Specific Identification :-

Specific Identification	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	1100	$50	$55000	1100	$50	$55000
Purchases:-
January 30	2150	$60	$129000	450	$60	$27000	1700	$60	$102000
May 1	850	$85	$72250	400	$85	$34000	450	$85	$38250
Total	4100		$256250	1950		$116000	2150		$140250

(2a) Highest Gross Profit Method = First in First out due to lowest Cost of Goods sold

       Option (C) is correct

(2b) Lowest income tax in Last in First out method due to highest Cost of goods sold.

Highest cost of goods sold result in lowest gross profit . Hence lowest Income tax in LIFO method

Option (A) is correct