Question

Scrappers Supplies tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.
Transactions Units Unit Cost
Beginning inventory, January 1 240 $21
Transactions during the year:
A. Purchase on account, March 2 320 23
B. Cash sale, April 1 ($37 each) (390)
C. Purchase on account, June 30 290 27
D. Cash sale, August 1 ($37 each) (95)
TIP: Although the purchases and sales are listed in chronological order, Scrappers determines the cost of goods sold after all of the purchases have occurred.
Required:
1. Compute the cost of goods available for sale, cost of ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods:
A. Last-in, first-out.
B. Weighted average cost.
C. First-in, first-out.
D. Specific identification, assuming that the April 1 sale was selected one-fifth from the beginning inventory and four-fifths from the purchase of March 2. Assume that the sale of August 1 was selected from the purchase of June 30.
2A. Of the four methods, which will result in the highest gross profit?
Last-in, first-out
Weighted average cost
First-in, first-out
Specific identification
2B. Of the four methods, which will result in the lowest income taxes?
Last-in, first-out
Weighted average cost
First-in, first-out
Specific identification

Answer 1

Answer:

1. Compute the cost of goods available for sale, cost of ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods:

A. Last-in, first-out:

• cost of goods available for sale = $20,230
• cost of goods sold = $12,315
• ending inventory = $7,915

B. Weighted average cost:  

• cost of goods available for sale = $20,230
• cost of goods sold = $11,543
• ending inventory = $8,687

C. First-in, first-out:

• cost of goods available for sale = $20,230
• cost of goods sold = $10,675
• ending inventory = $9,555

D. Specific identification, assuming that the April 1 sale was selected one-fifth from the beginning inventory and four-fifths from the purchase of March 2. Assume that the sale of August 1 was selected from the purchase of June 30:

• cost of goods available for sale = $20,230
• cost of goods sold = $11,379
• ending inventory = $8,851

2A. Of the four methods, which will result in the highest gross profit?

• First-in, first-out , since COGS is lowest

2B. Of the four methods, which will result in the lowest income taxes?

• Last-in, first-out , since COGS are highest

Explanation:

Beginning inventory, January 1 240 $21  = $5,040

A. Purchase on account, March 2 320 $23 = $ 7,360

C. Purchase on account, June 30 290 $27  = $7,830

total 850 units, $20,230

B. Cash sale, April 1 ($37 each) (390)

D. Cash sale, August 1 ($37 each) (95)

total units sold 485 units

COGS:

LIFO = (290 x $27) + (195 x $23) = $7,830 + $4,485 = $12,315

FIFO = (240 x $21) + (245 x $23) = $5,040 + $5,635 = $10,675

WA = ($20,230 / 850) x 485 = $11,543

SI = (78 x $21) + (312 x $23) + (95 x $27) = $1,638 + $7,176 + $2,565 = $11,379