Question

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?

Answer 1

	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
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