Question

PQR Corporation had an inventory of widgets on hand on January 1, 2016 which cost $10 per widget. During 2016 PQR increased its widget inventory through two purchases. On February 1, PQR purchased another 1000 widgets at a cost of $13 per widget; and on September 1, 2016 it purchased another 1000 widgets at 15 per widget. There was only one sale of widgets during 2016. It occurred on December 11, 2016 when 1500 widgets were sold.

What was the cost of goods sold and closing inventory value for the widgets at December 31, 2016, the end of PQR’s fiscal year using A) the average cost method, B) the FIFO cost method and C) the LIFO cost method?

Opening and ending inventory quantity are not provided.

Answer 1

(A)Computation of the cost of goods sold and closing inventory value at December 31, 2016 by the average cost method.We have,

Units available for sale = 1,000 + 1,000 = 2,000 widgets

Units sold = 1,500 widgets

Units in ending inventory = 2,000 - 1,500 = 500 widgets

Particulars	units	Price per unit	Total cost
Jan.1, 2016	0	$ 10.00	0
Feb.1, 2016 Purchase	1,000	$ 13.00	$ 13,000
Sep.1,2016 Purchase	1,000	$ 15.00	$ 15,000
Average unit cost	2,000	$ 14.00	$ 28,000

Average unit cost = Total cost / Total units = 28,000 / 2,000 = $ 14.00

Cost of good sold = Units sold x Average unit cost

Cost of goods sold = 1,500 x $ 14.00 = $ 21,000

Ending Inventory = 500 x 14.00 = $ 7,000

(B) Computation of the cost of goods sold and closing inventory value at December 31, 2016 by the FIFO cost method.We have,

Units available for sale = 1,000 + 1,000 = 2,000 widgets

Units sold = 1,500 widgets

Units in ending inventory = 2,000 - 1,500 = 500 widgets

Particulars	units	Price per unit	Total cost
Sales from Feb.1,2016 inventory	1,000	$ 13.00	$ 13,000
Sales from Sep.1,2016 inventory	500	$ 15.00	$ 7,500
Cost of Goods sold	1,500		$ 20,500
Ending inventory	500	$ 15.00	$ 7,500

(C)Computation of the cost of goods sold and closing inventory value at December 31, 2016 by the LIFO cost method.We have,

Units available for sale = 1,000 + 1,000 = 2,000 widgets

Units sold = 1,500 widgets

Units in ending inventory = 2,000 - 1,500 = 500 widgets

Particulars	units	Price per unit	Total cost
Sales from Sep.1,2016 inventory	1,000	$ 15.00	$ 15,000
Sales from Feb1,2016 inventory	500	$ 13.00	$ 6,500
Cost of Goods sold	1,500		$ 21,500
Ending inventory	500	$ 13.00	$ 6,500