In: Accounting
Ein Company began operations in February 2019. Ein’s accounting records provide the following data for the remainder of 2019 for one of the items the company sells:
Activity |
Units |
Purchase Price (per unit) |
Sale Price (per unit) |
Beginning inventory | 9 | $58 | |
Purchase 1, Feb. 15 | 6 | 72 | |
Purchase 2, Mar. 22 | 8 | 80 | |
Sale 1, Apr. 9 | 10 | $150 | |
Purchase 3, May 29 | 9 | 86 | |
Sale 2, July 10 | 15 | 150 | |
Purchase 4, Sept. 10 | 8 | 96 | |
Sale 3, Oct. 15 | 12 | 150 |
Ein uses a perpetual inventory system. All purchases and sales were for cash.
1. Prepare the journal entries to record these transactions assuming Ein chooses to use the FIFO method.
2. Conceptual Connection: Which method would result in the lowest amount paid for taxes?
Ans 1. | |||
Ein Company | |||
Date | Account Title | Dr $ | Cr $ |
Feb 15.2019. | Inventory | 432 | |
Cash | 432 | ||
Mar 22.2019. | Inventory | 640 | |
Cash | 640 | ||
Apr 9. | Sales | 1,500 | |
Cash | 1,500 | ||
Cost of Goods Sold | 594 | ||
Inventory | 594 | ||
May 29.2019. | Inventory | 774 | |
Cash | 774 | ||
Jul 10.2019. | Sales | 2,250 | |
Cash | 2,250 | ||
Cost of Goods Sold | 1,172 | ||
Inventory | 1,172 | ||
Sep 10.2019. | Inventory | 768 | |
Cash | 768 | ||
Oct 15. | Sales | 1,800 | |
Cash | 1,800 | ||
Cost of Goods Sold | 1,082 | ||
Inventory | 1,082 |
Ans 2. | ||
As the cost of Inventory is on an increasing trend, | ||
using LIFO method will increase the Cost of Goods Sold | ||
and reduce the Taxable income and amount of tax | ||
payable. So LIFO method will result in the lowest Tax | ||
amount. |
Inventory working FIFO
Opening Stock | Purchase | Total Stock | Sales | Closing Stock | |||||||||||
Date | Unit | Rate | Value | Unit | Rate | Value | Unit | Rate | Value | Unit | Rate | Value | Unit | Rate | Value |
Feb 1. | 9.00 | 58.00 | 522 | - | - | - | 9.00 | 522 | - | - | - | 9.00 | 58.00 | 522 | |
15-Feb | 9.00 | 522 | 6.00 | 72.00 | 432 | 15.00 | 954 | - | - | - | 15.00 | 63.60 | 954 | ||
Mar 22. | 15.00 | 954 | 8.00 | 80.00 | 640 | 23.00 | 1,594 | - | - | - | 23.00 | 69.30 | 1,594 | ||
Apr 9. | 23.00 | 1,594 | - | - | - | 23.00 | 1,594 | 9.00 | 58.00 | 522 | 14.00 | 76.57 | 1,072 | ||
Apr 9. | 14.00 | 1,072 | - | 14.00 | 1,072 | 1.00 | 72.00 | 72 | 13.00 | 76.92 | 1,000 | ||||
May 29. | 13.00 | 1,000 | 9.00 | 86.00 | 774 | 22.00 | 1,774 | - | - | - | 22.00 | 80.64 | 1,774 | ||
Jul 10. | 22.00 | 1,774 | - | - | - | 22.00 | 1,774 | 5.00 | 72.00 | 360 | 17.00 | 83.18 | 1,414 | ||
Jul 10. | 17.00 | 1,414 | - | - | - | 17.00 |
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