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
