The beginning inventory at Midnight Supplies and data on purchases and sales for

Question

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period ending March 31, are as follows:

Date

Exhibit 3

Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in

Exhibit 3

, using the first-in, first-out method.

Balances

CHART OF ACCOUNTSMidnight SuppliesGeneral Ledger

Interest Expense

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account and date your journal entry March 31. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

1

2

3

4

3. Determine the gross profit from sales for the period.

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Sales minus cost of merchandise sold equals gross profit.

4. Determine the ending inventory cost as of March 31.

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The ending inventory is what is left after subtracting the cost of goods sold from the goods available for sale. Multiply the units remaining after the last sale by their corresponding most recent layer cost to determine the FIFO cost of the ending inventory.

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

Lower

Higher

Date

Transaction Number of Units Per Unit Total Jan. 1 Inventory 2,500 $64.00 $160,000 10 Purchase 7,600 72.00 547,200 28 Sale 3,700 128.00 473,600 30 Sale 1,400 128.00 179,200 Feb. 5 Sale 500 128.00 64,000 10 Purchase 18,500 74.00 1,369,000 16 Sale 8,900 133.00 1,183,700 28 Sale 8,500 133.00 1,130,500 Mar. 5 Purchase 15,000 75.60 1,134,000 14 Sale 10,000 133.00 1,330,000 25 Purchase 3,300 76.00 250,800 30 Sale 7,650 133.00 1,017,450

Explanation / Answer

FIRST IN FIRST OUT METHOD Date Purchases Cost of Merchandise Sold Inventory Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Jan. 1 2500 $64.00 $160,000 10 7600 $72.00 $547,200 2500 $64.00 $160,000 10 7600 $72.00 $547,200 28 2500 $64.00 $160,000 28 1200 $72.00 $86,400 6400 $72.00 $460,800 30 1400 $72.00 $100,800 5000 $72.00 $        360,000 Feb. 5 500 $72.00 $36,000 4500 $72.00 $        324,000 10 18500 $74 $1,369,000 4500 $      72.00 $        324,000 10 18500 $      74.00 $     1,369,000 16 4500 $       72.00 $324,000 16 4400 $       74.00 $325,600 14100 $      74.00 $     1,043,400 28 8500 $       74.00 $629,000 5600 $      74.00 $        414,400 Mar. 5 15000 $75.60 $1,134,000 5600 $      74.00 414400 5 15000 $      75.60 $     1,134,000 14 5600 $       74.00 $        414,400 14 4400 $       75.60 $        332,640 10600 $      75.60 $        801,360 25 3300 $76.00 $250,800 10600 $      75.60 $        801,360 25 3300 $      76.00 $        250,800 30 7650 $       75.60 $        578,340 2950 $      75.60 $        223,020 30 3300 $      76.00 $        250,800 SUM 44400 $                                        3,301,000 40650 $        2,987,180 JOURNAL ENTRY Date Accounts Debit Credit Jan 28 Accounts Receivable $            473,600 (128*3700) Sales $     473,600 Cost of merchandise sold $246,400 (160000+86400) Inventory $246,400 Jan 30 Accounts Receivable $            179,200 (1400*128) Sales $     179,200 Cost of merchandise sold $100,800 Inventory $100,800 Feb 5 Accounts Receivable $              64,000 (500*128) Sales $        64,000 Cost of merchandise sold $36,000 Inventory $36,000 Feb 16 Accounts Receivable $        1,183,700 (8900*133) Sales $ 1,183,700 Cost of merchandise sold $649,600 (324000+325600) Inventory $649,600 Feb 28 Accounts Receivable $        1,130,500 (8500*133) Sales $ 1,130,500 Cost of merchandise sold $629,000 Inventory $629,000 March 14 Accounts Receivable $        1,330,000 (10000*133) Sales $ 1,330,000 Cost of merchandise sold $            747,040 (414400+332640 Inventory $     747,040 March 30 Accounts Receivable $        1,017,450 (7650*133) Sales $ 1,017,450 Cost of merchandise sold $            578,340 Inventory $     578,340 $2,987,180 2 TotalCost of merchandise sold $2,987,180 TotalSales $        5,378,450 3 Gross Profit $        2,391,270 (5378450-2987180) 4 Ending Inventory Cost $            473,820 (223020+250800) 5 Inventory using Last in first out will be lower Reason: Cost are increasing over time Under LIFO(Last in First Out) method, the old items at lower cost will lie in closing inventory

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