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	$64.00	$160,000
	10	Purchase	7,600	72.00	547,200
	28	Sale	3,700	128.00	473,600
	30	Sale	1,400	128.00	179,200
Feb.	5	Sale	500	128.00	64,000
	10	Purchase	18,500	74.00	1,369,000
	16	Sale	8,900	133.00	1,183,700
	28	Sale	8,500	133.00	1,130,500
Mar.	5	Purchase	15,000	75.60	1,134,000
	14	Sale	10,000	133.00	1,330,000
	25	Purchase	3,300	76.00	250,800
	30	Sale	7,650	133.00	1,017,450

	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? 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 CHART OF ACCOUNTSMidnight SuppliesGeneral 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 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. PAGE 10 JOURNAL ACCOUNTING EQUATION DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 2 3 4 3. Determine the gross profit from sales for the period. Points: 0 / 1 Feedback Check My Work Sales minus cost of merchandise sold equals gross profit. 4. Determine the ending inventory cost as of March 31. Points: 0 / 1 Feedback Check My Work The ending inventory is what is left after subtracting the cost of goods sold from the goods available for sale. Multiply the units remaining after the last sale by their corresponding most recent layer cost to determine the FIFO cost of the ending inventory. 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

	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							2500	$64.00	$160,000
	10	7600	$72.00	$547,200				2500	$64.00	$160,000
	10							7600	$72.00	$547,200
	28				2500	$64.00	$160,000
	28				1200	$72.00	$86,400	6400	$72.00	$460,800
	30				1400	$72.00	$100,800	5000	$72.00	$        360,000
	Feb. 5				500	$72.00	$36,000	4500	$72.00	$        324,000
	10	18500	$74	$1,369,000				4500	$      72.00	$        324,000
	10							18500	$      74.00	$     1,369,000
	16				4500	$       72.00	$324,000
	16				4400	$       74.00	$325,600	14100	$      74.00	$     1,043,400
	28				8500	$       74.00	$629,000	5600	$      74.00	$        414,400
	Mar. 5	15000	$75.60	$1,134,000				5600	$      74.00	414400
	5							15000	$      75.60	$     1,134,000
	14				5600	$       74.00	$        414,400
	14				4400	$       75.60	$        332,640	10600	$      75.60	$        801,360
	25	3300	$76.00	$250,800				10600	$      75.60	$        801,360
	25							3300	$      76.00	$        250,800
	30				7650	$       75.60	$        578,340	2950	$      75.60	$        223,020
	30							3300	$      76.00	$        250,800
	SUM	44400		$                                        3,301,000	40650		$        2,987,180
				JOURNAL ENTRY
		Date		Accounts	Debit	Credit
		Jan	28	Accounts Receivable	$            473,600		(128*3700)
				Sales		$     473,600
				Cost of merchandise sold	$246,400		(160000+86400)
				Inventory		$246,400
		Jan	30	Accounts Receivable	$            179,200		(1400*128)
				Sales		$     179,200
				Cost of merchandise sold	$100,800
				Inventory		$100,800
		Feb	5	Accounts Receivable	$              64,000		(500*128)
				Sales		$        64,000
				Cost of merchandise sold	$36,000
				Inventory		$36,000
		Feb	16	Accounts Receivable	$        1,183,700		(8900*133)
				Sales		$ 1,183,700
				Cost of merchandise sold	$649,600		(324000+325600)
				Inventory		$649,600
		Feb	28	Accounts Receivable	$        1,130,500		(8500*133)
				Sales		$ 1,130,500
				Cost of merchandise sold	$629,000
				Inventory		$629,000
		March	14	Accounts Receivable	$        1,330,000		(10000*133)
				Sales		$ 1,330,000
				Cost of merchandise sold	$            747,040		(414400+332640
				Inventory		$     747,040
		March	30	Accounts Receivable	$        1,017,450		(7650*133)
				Sales		$ 1,017,450
				Cost of merchandise sold	$            578,340
				Inventory		$     578,340			$2,987,180
			2	TotalCost of merchandise sold	$2,987,180
				TotalSales	$        5,378,450
			3	Gross Profit	$        2,391,270	(5378450-2987180)
			4	Ending Inventory Cost	$            473,820	(223020+250800)
			5	Inventory using Last in first out	will be lower
				Reason:
				Cost are increasing over time
				Under LIFO(Last in First Out) method, the old items at lower cost will lie in closing inventory