PA7-1 Analyzing the Effects of Four Alternative Inventory Methods in a Periodic
ID: 2539626 • Letter: P
Question
PA7-1 Analyzing the Effects of Four Alternative Inventory Methods in a Periodic Inventory System [LO 7-3] Gladstone Company 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 Transactions during the year: a. Purchase, January 30 b. Sale, March 14 ($100 each) c. Purchase, May1 d. Sale, August 31 ($100 each) 1,800 $50 2,500 1,200 62 (1,450) 80 (1,900) Assuming that for Specific identification method (item 1d) the March 14 sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31 was selected from the remainder of the beginning inventory, with the balance from the purchase of May Required 1. Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods Amount of Goods Available for Sale Cost of Goods Sold Ending Inventory a. Last-in. first-out b. Weighted average cost c. First-in, first-out d. Specific identificationExplanation / Answer
Last in First out method:
Amount of goods available for sale = Value of opening inventory + cost of goods purchases
= 1800*$50 + 2500*$62 + 1200*$80
= $341,000
Ending Inventory =
sales on march 14made = 1450 out of purchase in january 30 of 2500 units,
Remaining out of purchases made on january 30 = 1050
Sales on August 31 = 1900 units, purchases on May 1 = 1200
purchases made on may1 i.e., 1200 units sold on August31.
In august 31 additional units i.e., inexcess of purchases made in May 1 = 1900-1200 = 700units
The 700 units are sold from remaining on March 14 i.e., 1050 units.
Balane units = 1050 - 700 = 350units
Ending inventory in units = 1800 + 350 = 2150 units
Ending inevntory in value = 1800*$50 + 350 *$62
= $111,700
Cost of goods sold = Cost of goods available for sale - ending inventory
. = $341,000 - $111,700
=$229,300
Weighted average cost method:
Amount of goods available for sale = Value of opening inventory + cost of goods purchases
= 1800*$50 + 2500*$62 + 1200*$80
= $341,000
Ending Inventory =
weighted average cost per unit = cost of gooods available for sale / no. of units available
No. of units available = 1800+2500+1200 = 5500 units
weighted average cost per unit = 341,000 / 5500 = $62 per unit
Units sold = 1450+1900 = 3350 units
Ending inventory in units = 5500 - 3350 = 2150 units
Ending inevntory = 2150 * $62
= $133,300
Cost of goods sold = Cost of goods available for sale - ending inventory
. = $341,000 - $133,300
=$207,700
First in First out method:
Amount of goods available for sale = Value of opening inventory + cost of goods purchases
= 1800*$50 + 2500*$62 + 1200*$80
= $341,000
Ending Inventory =
sales on march 14made = 1450 out of opening inevntory of 1800 units,
Remaining opening inventory = 1800-1450 = 350units
Sales on August 31 = 1900 units, out of opening invbemtory = 350
Remaining sales = 1900-350 = 1550 units sold out of purchases made on January 30 = 1550 units
Remaining units out of purchases made on January 30 = 2500-1550 = 950 units
and also purchases made on may1 i.e., 1200 units will be in closing inventory
Ending inventory in units = 950 + 1200 = 2150 units
Ending inevntory = 950*$62 + 1200*$80
= $154,900
Cost of goods sold = Cost of goods available for sale - ending inventory
. = $341,000 - $154,900
=$186,100
Specific Identification method:
Amount of goods available for sale = Value of opening inventory + cost of goods purchases
= 1800*$50 + 2500*$62 + 1200*$80
= $341,000
Ending Inventory =
sales on march 14made = 1450 out of opening inevntory of 1800 units = 2/5 * 1450 =580 units,
Remaining opening inventory = 1800-580 = 1220units
out of Purchases on January 30 of 2500 units = 3/5 * 1450 =870 units,
Remaining opening inventory = 2500-870 = 1630units
sales on August 31 made = 1450 out of remaining opening inevntory =1220 units,
out of Purchases on May 1 of 1200 units = 1900 - 1220 = 680 units,
Remaining purchases on may 1 = 1200-680 = 520units
Ending inventory in units = 1630+520 = 2150 units
Ending inevntory = 1630*$62 + 520*$80
= $142,660
Cost of goods sold = Cost of goods available for sale - ending inventory
. = $341,000 - $142,660
=$198,340
Highest profit will araise in First in First put method as cost of goods sold is less in first in first methid compared to other methods.
Lowest income tax will be paid in last in first out method as the cost of goods sold is higher in that method and hence there will be lower income compatred to other methods.
Therefore lower income tax will be paid in last in first out method.
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