Question

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period ending March 31, are as follows:

Date		Transaction	Number of Units	Per Unit	Total
Jan.	1	Inventory	2,500	$70.00	$175,000
	10	Purchase	8,000	78.00	624,000
	28	Sale	3,800	140.00	532,000
	30	Sale	1,250	140.00	175,000
Feb.	5	Sale	500	140.00	70,000
	10	Purchase	17,000	80.00	1,360,000
	16	Sale	9,100	145.00	1,319,500
	28	Sale	8,700	145.00	1,261,500
Mar.	5	Purchase	14,300	81.60	1,166,880
	14	Sale	9,800	145.00	1,421,000
	25	Purchase	3,000	82.00	246,000
	30	Sale	7,900	145.00	1,145,500

Instructions
1.	Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3 using the first-in, first-out method.
2.	Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account and date your journal entry March 31. Refer to the Chart of Accounts for exact wording of account titles.
3.	Determine the gross profit from sales for the period.
4.	Determine the ending inventory cost as of March 31.
5.	Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

chart of accounts ensure to use the exact lables

CHART OF ACCOUNTS
Midnight Supplies
General Ledger
ASSETS 110 Cash 111 Petty Cash 120 Accounts Receivable 131 Notes Receivable 132 Interest Receivable 141 Merchandise Inventory 145 Office Supplies 146 Store Supplies 151 Prepaid Insurance 181 Land 191 Office Equipment 192 Accumulated Depreciation-Office Equipment 193 Store Equipment 194 Accumulated Depreciation-Store Equipment LIABILITIES 210 Accounts Payable 221 Notes Payable 222 Interest Payable 231 Salaries Payable 241 Sales Tax Payable EQUITY 310 Owner, Capital 311 Owner, Drawing 312 Income Summary	REVENUE 410 Sales 610 Interest Revenue EXPENSES 510 Cost of Merchandise Sold 515 Credit Card Expense 516 Cash Short and Over 520 Salaries Expense 531 Advertising Expense 532 Delivery Expense 533 Insurance Expense 534 Office Supplies Expense 535 Rent Expense 536 Repairs Expense 537 Selling Expenses 538 Store Supplies Expense 561 Depreciation Expense-Office Equipment 562 Depreciation Expense-Store Equipment 590 Miscellaneous Expense 710 Interest Expense

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in

Exhibit 3

, using the first-in, first-out method.

Date	Purchases			Cost of Merchandise Sold			Inventory
	Quantity	Unit Cost	Total Cost	Quantity	Unit Cost	Total Cost	Quantity	Unit Cost	Total Cost
Jan. 1
10
10
28
28
30
Feb. 5
10
10
16
16
28
Mar. 5
5
14
14
25
25
30
30
31	Balances

3. Determine the gross profit from sales for the period.

4. Determine the ending inventory cost as of March 31.

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

Lower

Higher

Answer 1

Ans. 1	MIDNIGHT SUPPLIES
	Schedule of Cost of Merchandise Sold
	FIFO Method
	For the three - months ended March 31
	Purchase				Cost of merchandise sold			Balance
	Date	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost
	01-Jan							2500	$70.00	$175,000
	10-Jan	8000	$78.00	$624,000				2500	$70.00	$175,000
								8000	$78.00	$624,000
	28-Jan				2500	$70.00	$175,000
					1300	$78.00	$101,400	6700	$78.00	$522,600
	30-Jan				1250	$78.00	$97,500	5450	$78.00	$425,100
	05-Feb				500	$78.00	$39,000	4950	$78.00	$386,100
	10-Feb	17000	$80.00	$1,360,000				4950	$78.00	$386,100
								17000	$80.00	$1,360,000
	16-Feb				4950	$78.00	$386,100
					4150	$80.00	$332,000	12850	$80.00	$1,028,000
	28-Feb				8700	$80.00	$696,000	4150	$80.00	$332,000
	05-Mar	14300	$81.60	$1,166,880				4150	$80.00	$332,000
								14300	$81.60	$1,166,880
	14-Mar				4150	$80.00	$332,000
					5650	$81.60	$461,040	8650	$81.60	$705,840
	25-Mar	3000	$82.00	$246,000				8650	$81.60	$705,840
								3000	$82.00	$246,000
	30-Mar				7900	$81.60	$644,640	750	$81.60	$61,200
								3000	$82.00	$246,000
	Total				Cost of goods sold		$3,264,680	Ending inventory		$307,200
	*In FIFO method the units that have purchased first, are released the first one and the ending inventory
	units remain from the last purchases.
Ans. 2	General Journal		Debit	Credit
	Accounts receivable		$5,924,500
	Sales			$5,924,500
	(Total sales recorded)
	Cost of merchandise sold		$3,264,680
	Merchandise inventory			$3,264,680
	(Total cost of merchandise sold)
	*Calculation of sales:
	Date	Units	Rate	Cost
	28-Jan	3800	$140.00	$532,000
	30-Jan	1250	$140.00	$175,000
	05-Feb	500	$140.00	$70,000
	16-Feb	9100	$145.00	$1,319,500
	28-Feb	8700	$145.00	$1,261,500
	14-Mar	9800	$145.00	$1,421,000
	30-Mar	7900	$145.00	$1,145,500
	Total sales			$5,924,500
Ans. 3	Sales		$5,924,500
	Less: Cost of goods sold		$3,264,680
	Gross profit		$2,659,820
Ans. 4	Ending inventory		$307,200
Ans. 5	The inventory would be lower while using the last in first out method.
	This is so because inventory remains from first (starting) purchases in
	Last in first out method and the unit cost of starting purchases are lower
	so the cost of inventory will be calculated on lower unit costs.