Question

Inventory

Miller Corp. sells chairs. Miller reported the following information (all transactions are on account) for the quarter ending March 31, 2013:

                                                                      Purchases                                         Sales                     

                                                            Units           Unit Cost             Units               Selling Price/Unit

Jan.       1      Beginning inventory      112                  $72

           13      Purchase                           76                  $71

           29      Sale                                                                                121                        $99

Feb.      3      Purchase                           56                  $69

           16      Purchase                         102                  $65                       

Mar. 21      Sale                                                                                  67                        $98           

Required:

In requirements 1-3, Miller uses a periodic inventory system.

1. Calculate the cost of ending inventory, cost of goods sold, gross profit, and gross profit percentage for the quarter ending March 31, 2013, assuming the FIFO inventory costing method is used.                                                                                                     

2. Would Miller’s gross profit increase or decrease if it uses the weighted-average cost method instead of FIFO? You simply need to explain the direction of the change in gross profit. No calculations are required.                                                                                    

3. Miller reports its ending inventory at the Lower of Cost and Net Realizable Value (LCNRV); the net realizable value of chairs declined to $66 per unit on March 31, 2013. Prepare journal entries for March 31, 2013, assuming the FIFO inventory costing method is used. If no journal entry is required, indicate “no entry required” and briefly explain the reason.

In requirements 4, Miller uses a perpetual inventory system.

4. Prepare journal entries to record the sale on January 29, assuming the FIFO inventory costing method is used.

Answer 1

Units available for sale = 112+76+56+102 = 346 Units

Units sold = 121 + 67 = 188 Units

Ending Inventory = 346 - 188 = 158 Units

(1) When FIFO Method is used............

Cost of goods sold = 112 * 72 + 76 * 71 = 13460

Ending Inventory = 56* 69 + 102 * 65 = 10494

Gross profit = Sales - cost of goods sold = 18545 - 13460 =  5085

Sales = (121 * 99 + 67* 98 ) = 11979 + 6566 = 18545

Question - 2

During the falling prices, if we use the weighted average method, then average cost of goods sold decreases. Hence gross profit increases.

Question - 3

LCM ( Least of cost or market value) ........ Market or NRV = 66 * 158 Units = 10428 and Cost = 10494

Thus we see that Inventory value fell below cost, hence we have to put a journal to record the loss on inventory.

	Debit	Credit
Allowance to decrease Value of Inventory to LCM	66
Inventory a/c ( 10494 - 10428)		66
Income summary a/c	66
Allowance to decrease value of inventory to LCM		66

Question - 4

	Debit	Credit
Cash / Accounts receivables a/c	11979
Sales revenue a/c		11979
Cost of goods sold a/c	8703
Inventory a/c ( 112 units* 72 + 9 Units * 71)		8703

Please comment for any further clarification or explanation ............... all the best.