Question

Pym Corp. was formed on 1/1/08 and is in the business of buying and selling erasers. The cost of purchasing erasers and the number of erasers held in inventory has steadily increased since the company was formed. Which of the following inventory methods will provide the most useful information regarding the inventory amount presented in the 12/31/17 balance sheet?

LIFO

FIFO

Average Cost

Can’t be determined with the information provided

Rogers Inc. is a wholesaler of office supplies that began operations in 2017. The activity for Model Z calculators during 2018 is shown below. (A year end physical inventory indicates 8,000 Model III calculators on hand.)

                        Date               Transaction                           Units                             Cost

                        August 1           Purchase                           4,000                          $18.00

                        September 4    Purchase                           6,000                          18.60

                        September 16 Sales                                  5,200

                        November 12   Purchase                           7,600                          19.00

                        December 23   Sales                                  6,800

                        December 30   Purchase                           2,400                          20.00

If Rogers Inc. uses a LIFO periodic inventory system, the ending inventory of Model Z calculators at December 31 is reported as

$146,400

$150,080

$154,000

$154,400

Rogers Inc. is a wholesaler of office supplies that began operations in 2017. The activity for Model Z calculators during 2018 is shown below. (A year end physical inventory indicates 8,000 Model III calculators on hand.)

                        Date               Transaction                           Units                             Cost

                        August 1           Purchase                           4,000                          $18.00

                        September 4    Purchase                           6,000                          18.60

                        September 16 Sales                                  5,200

                        November 12   Purchase                           7,600                          19.00

                        December 23   Sales                                  6,800

                        December 30   Purchase                           2,400                          20.00

If Rogers Inc. uses a FIFO periodic inventory system, the ending inventory of Model Z calculators at December 31 is reported as

$146,400

$150,080

$154,000

$154,400

Hansen Corp. purchases a machine for $160,000 on 1/1/2018. The machine has a useful life of 5 years and has a $10,000 residual value.

What is depreciation expense in 2019 under the 200% (double) declining balance method?

$64,000

$30,000

$38,400

$36,000

What is Hansen’s depreciation expense in 2019 under the straight-line method?

$32,000

$30,000

$38,400

$36,000

Answer 1

A. Pym Corp.:

In case of rising prices, FIFO method gives understated cost of goods sold, LIFO method gives cost of goods sold of the whole period as per prices prevailing at the end of period. Average Cost (AVCO) method will be in the middle of both. Therefore, the making period-to-period comparisons much more meaningful and requiring lesser adjustments unlike FIFO or LIFO that may require price adjustments for analysis purposes. Hence Average Cost method of valuation of Inventory will provide the most useful information regarding the inventory amount presented in the 12/31/17 balance sheet.

B. Rogers Inc. LIFO METHOD:

September 16th sale of 5,200 units is out of September 4 purchase. Hence, September 4 purchase still unsold = 800 units.

December 23rd sale of 6,800 units is out of November 12 purchase. Hence, November 12 purchase still unsold = 800 units.

August 1 purchase still unsold = 4,000 units.

December 30th purchase still unsold = 2,400 units.

Inventory Valuation

Particulars	Units	Cost Per Unit	Total Cost
August 1 purchase	4,000	18	72,000
September 4 purchase	800	18.60	14,880
November 12 purchase	800	19	15,200
December 30th purchase	2,400	20	48,000
Total	8,000	NA	1,50,080

C. Rogers Inc. FIFO METHOD:

September 16th sale of 4,000 units is out of August 1 purchase. Hence, August 1 purchase still unsold = 000 units.

September 16th sale of 1,200 units is out of September 4 purchase. Hence, September 4 purchase still unsold = 4,800 units.

December 23rd sale of 4,800 units is out of September 4 purchase. Hence, September 4 purchase still unsold = 000 units.

December 23rd sale of 2,000 units is out of November 12 purchase. Hence, November 12 purchase still unsold = 5,600 units.

December 30th purchase still unsold = 2,400 units.

Inventory Valuation

Particulars	Units	Cost Per Unit	Total Cost
August 1 purchase	000	18	0000
September 4 purchase	000	18.60	0000
November 12 purchase	5,600	19	1,06,400
December 30th purchase	2,400	20	48,000
Total	8,000	NA	1,54,400

D. Hansen Corp.: depreciation expense in 2019 under the Straight line method:

Cost of the machine = $1,60,000

Useful Life = 5 Years

Salvage Value = 10,000

Depreciation per year = (1,60,000-10,000) / 5 Years = 30,000

Depreciation Percentage = 30,000 / 1,50,000 = 20%

Depreciation Expense under straight Line method for 2019 = 1,50,000*20% = 30,000.

Depreciation expense in 2019 under the 200% (double) declining balance method:

Straight line depreciation Percentage = 20%

Double Declining Balance method Depreciation percentage = 20% * 2 = 40%

Depreciation Expense in Year 1 = 1,60,000* 40% = 64,000

Deprecation Expense in year 2 = (1,60,000-64,000)*40% = 38,400

Hence depreciation for the year 2019 is 38,400.