Sea Travel sells motor boats. One of Sea Travel\'s most popular models is the Wi

Question

Sea Travel sells motor boats. One of Sea Travel's most popular models is the Wing. During the current year, Sea Travel purchased 12 Wings at the following costs:

On April 28, Sea Travel sold five Wings to the Jack Sport racing team. The remaining seven boats remained in inventory at June 30, the end of Sea Travel's fiscal year.

Assume that Sea Travel uses a perpetual inventory system.

a. Compute the cost of goods sold relating to the sale on April 28 and the ending inventory of Wing boats at June 30, using the following cost flow assumptions: 1. Average cost (round to the nearest whole dollar). 2. FIFO. 3. LIFO.

Show the number of units and the unit costs of each layer comprising the ending inventory. You may determine the cost of goods sold by deducting ending inventory from the cost of goods available for sale.

b. If Sea Travel uses the LIFO cost flow assumption for income tax purposes, can it use the FIFO method for financial reporting purposes? Explain

Purchase Date Units Purchased Unit Cost Total Cost April 1 4 $8,000 $32,000 April 19 5 $8,200 $41,000 May 8 3 $8,500 $25,500 Total 12 $98,500

Explanation / Answer

Unit Cost under Average COst Method = Total Cost/Total Units Purchased

= 98,500/12

= $8208.33

..

1)The cost of goods sold relating to the sale on April 28:-

a)Average Cost = 5*8208.33

= $41,042

..

b)FIFO = Sales made on Apr-28 will be made out of Apr-1 purchases (4 units) & Apr-19 purchases(1 unit)

= (8000*4) + (8200*1)

= $40,200

..

c)LIFO= Sales made on Apr-28 will be made out of Apr-19 purchases(5 units)

= 5*8200

= $41,000

..

..

Ending Inventory :-

a)Average Cost = (12-5)*8208.33

= $57,458

..

b)FIFO = 4 units from Apr-19 Purchases & 3 units from May-8 Purcahases

= (4*8200) + (3*8500)

= $58,300

..

c)LIFO = 4 units from Apr-1 Purchases & 3 units from May-8 Purcahases

= (4*8000) + (3*8500)

= $57,500

..

..

..

..

..

Part-b:-

Yes ,Sea Travel can use the FIFO method for financial reporting purposes if it uses the LIFO cost flow assumption for income tax purposes.

(Like we have Depreciation - Deifferent for Income tax Purpose and different for  financial reporting purposes)

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