Question

The Shirt Shop had the following transactions for T-shirts for 2016, its first year of operations: Jan. 20 Purchased 590 units @ $8 = $ 4,720 Apr. 21 Purchased 390 units @ $10 = 3,900 July 25 Purchased 470 units @ $13 = 6,110 Sept. 19 Purchased 280 units @ $15 = 4,200 During the year, The Shirt Shop sold 1,380 T-shirts for $24 each. 7. Required information Required a.Compute the amount of ending inventory The Shirt Shop would report on the balance sheet, assuming the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average. (Round cost per unit to 2 decimal places and final answers to the nearest whole dollar amount.) b. Record the above transactions in general journal form and post to T-accounts using (1) FIFO, (2) LIFO, and (3) weighted average. Use a separate set of journal entries and T-accounts for each method. Assume all transactions are cash transactions. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. c. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

Answer 1

Part a)

The value of ending inventory under each method is calculated as below:

The quantity of ending inventory will be 350 units (590 + 390 + 470 + 280 - 1,380).

Now, we can determine the value of ending inventory as follows:

Ending Inventory (FIFO) = 280*15 (from September 19 Purchase) + (350 - 280)*13 (from July 25 Purchase) = $5,110

Ending Inventory (LIFO) = 350*8 (from January 20 Purchase) = $2,800

Ending Inventory (Weighted Average) = (Total Cost)/Total Units*Units in Ending Inventory = (4,720 + 3,900 + 6,110 + 4,200)/(590 + 390 + 470 + 280)*350 = $3,830

_____

Part b)

The journal entries under each method are provided as below:

FIFO:

Date	Account Titles	Debit	Credit
Jan.20	Merchandise Inventory	$4,720
	Cash		$4,720
Apr. 21	Merchandise Inventory	$3,900
	Cash		$3,900
Jul. 25	Merchandise Inventory	$6,110
	Cash		$6,110
Sept. 19	Merchandise Inventory	$4,200
	Cash		$4,200
2016	Cash (1,380*24)	$33,120
	Sales Revenue		$33,120
	Cost of Goods Sold (4,720 + 3,900 + 6,110 + 4,200 - 5,110)	$13,820
	Merchandise Inventory		$13,820

_____

LIFO:

Date	Account Titles	Debit	Credit
Jan.20	Merchandise Inventory	$4,720
	Cash		$4,720
Apr. 21	Merchandise Inventory	$3,900
	Cash		$3,900
Jul. 25	Merchandise Inventory	$6,110
	Cash		$6,110
Sept. 19	Merchandise Inventory	$4,200
	Cash		$4,200
2016	Cash (1,380*24)	$33,120
	Sales Revenue		$33,120
	Cost of Goods Sold (4,720 + 3,900 + 6,110 + 4,200 - 2,800)	$16,130
	Merchandise Inventory		$16,130

_____

Weighted Average:

Date	Account Titles	Debit	Credit
Jan.20	Merchandise Inventory	$4,720
	Cash		$4,720
Apr. 21	Merchandise Inventory	$3,900
	Cash		$3,900
Jul. 25	Merchandise Inventory	$6,110
	Cash		$6,110
Sept. 19	Merchandise Inventory	$4,200
	Cash		$4,200
2016	Cash (1,380*24)	$33,120
	Sales Revenue		$33,120
	Cost of Goods Sold (4,720 + 3,900 + 6,110 + 4,200 - 3,830)	$15,100
	Merchandise Inventory		$15,100

_____

The T-Accounts under each method are given as below:

FIFO:

Cash
2016	33,120	Jan.20	4,720
		Apr. 21	3,900
		Jul. 25	6,110
		Sept. 19	4,200
Balance	$14,190

____

Sales Revenue
		2016	33,120

____

Cost of Goods Sold
2016	13,820

____

Merchandise Inventory
Jan.20	4,720	2016	13,820
Apr. 21	3,900
Jul. 25	6,110
Sept. 19	4,200
Balance	$5,110

____

LIFO:

Cash
2016	33,120	Jan.20	4,720
		Apr. 21	3,900
		Jul. 25	6,110
		Sept. 19	4,200
Balance	$14,190

____

Sales Revenue
		2016	33,120

____

Cost of Goods Sold
2016	16,130

____

Merchandise Inventory
Jan.20	4,720	2016	16,130
Apr. 21	3,900
Jul. 25	6,110
Sept. 19	4,200
Balance	$2,800

____

Weighted Average:

Cash
2016	33,120	Jan.20	4,720
		Apr. 21	3,900
		Jul. 25	6,110
		Sept. 19	4,200
Balance	$14,190

____

Sales Revenue
		2016	33,120

____

Cost of Goods Sold
2016	$15,100

____

Merchandise Inventory
Jan.20	4,720	2016	15,100
Apr. 21	3,900
Jul. 25	6,110
Sept. 19	4,200
Balance	$3,830

____

Part c)

The difference in gross margin between the FIFO and LIFO cost flow assumptions is determined as below:

Gross Margin (FIFO) = 33,120 (Sales) - 13,820 (Cost of Goods Sold) = $19,300

Gross Margin (LIFO) = 33,120 (Sales) - 16,130 (Cost of Goods Sold) = $16,990

Difference in Gross Margin = Gross Margin (FIFO) - Gross Margin (LIFO) = 19,300 - 16,990 = $2,310