Question

Question 1: Miller Corp. sells chairs. Miller reported the following information (all transactions are on account

) for the quarter ending March 31, 2013

		Purchases		Sales
		Units	Unit Cost	Units	Selling
Unit/Price
01-Jan	Beg. Inv	112	$72
13	Purchase	76	$71
29	Sale			121	$99
03-Feb	Purchase	56	$69
16	Purchase	102	$65
21-Mar	Sale			87	$98

In requirements 1-3, Miller uses a periodic inventory system.

2. Would Miller’s gross profit increase or decrease if it uses the weighted-average cost method instead of FIFO? You simply need to explain the direction of the change in gross profit. No calculations are required.

3. Miller reports its ending inventory at the Lower of Cost and Net Realizable Value (LCNRV); the net realizable value of chairs declined to $66 per unit on March 31, 2013. Prepare journal entries for March 31, 2013, assuming the FIFO inventory costing method is uses. If no journal entry is required, indicate “no entry required” and briefly explain the reason.

In requirements 4, Miller uses a perpetual inventory system.

4. Prepare journal entries to record the sale on January 29, assuming the FIFO inventory costing method is used.

Answer 1

Q2. Miller's profit would increase by $439.90 if it uses Weighted Average Method for valuation in place of FIFO. ie., the difference between the value of closing stock / inventory as per Weighted Average Method, $9553.90 and FIFO, $ 9114.

In price deflationary situations, FIFO method of stock valuation will result in lower closing stock/inventory values as against Weighted Average or LIFO methods. Hence, FIFO method will result in lower profit.

Q3. "No Journal entry is required" in a periodic inventory system. Under periodic inventory system, physical inventory is determined at the end of the accounting period and cost of goods sold is determined using the closing stock valuation arrived during such physical verification.

Q4. Journal Entries under perpetual inventory system for sales on January 29.

Cash / Accounts Receivable A/c. Dr $11979.00

To Sales A/c $ 11979.00

(121 chairs sold @ $ 99 each)

Cost of Goods Sold A/c. Dr $ 8703.00

To Inventory A/c $ 8703.00

(Cost of inventory sold

112 Chairs @ $72 & 9 Chairs @ $71)