Background: This is a continuation of the activities at TECHNOGYM in January, 20
ID: 2574066 • Letter: B
Question
Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 – Dec. 31 financial year.
Exercise for Inventory:
TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.
Account Debit Credit
Accounts Receivable 17,607,500
Allowance for Doubtful Accounts 20,000
Purchases 85,832,500
Inventory 2,500,000
TechTone Sales Revenue 134,500,000
TechTone Sales Returns 2,017,500
Cost of TechTone Equipment Sold 0
Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:
Purchases for 2016 (normal operations)
Beginning:
5,000
units @
$500
each
Purchases:
Apr-May
40,000
units @
$500
each
Jun-Jul
35,000
units @
$505
each
Aug-Sep
48,500
units @
$515
each
Oct
24,000
units @
$520
each
Nov-Dec
20,000
units @
$535
each
Year-End Physical Inventory Count
38,000
units
Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.
Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.
Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!
Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layers—not based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.
DV LIFO
Ending Inventory at Year-End Cost
Index
Ending Inventory at Base-Yr Cost
Inventory Layers at
Base-Yr Cost
Inventory Layers at
Acq.-Yr Cost
Ending Inventory at DV LIFO Cost
LIFO Reserve Adjustment
2015
2016
Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!
Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.
FIFO Method
DVLIFO Method
Income Statement
Cost of TechTone Equipment Sold
Balance Sheet
Inventory
Which method gives higher net income?
Which method gives higher assets?
Purchases for 2016 (normal operations)
Beginning:
5,000
units @
$500
each
Purchases:
Apr-May
40,000
units @
$500
each
Jun-Jul
35,000
units @
$505
each
Aug-Sep
48,500
units @
$515
each
Oct
24,000
units @
$520
each
Nov-Dec
20,000
units @
$535
each
Year-End Physical Inventory Count
38,000
units
Explanation / Answer
1. Ending Inventory and Cost of Goods Sold using FIFO for 2016. Value of Beg. Inv. & Purchases Month Units at Value Beginning Inventory 5000 500 2500000 Purchases during 2016: Apr-May 40,000 500 20000000 Jun-Jul 35,000 505 17675000 Aug-Sep 48,500 515 24977500 Oct 24,000 520 12480000 Nov-Dec 20,000 535 10700000 Total purchases during 2016 167,500 85,832,500 Goods available for sale(Beg.Inv. +Purchases) 172,500 88,332,500 Less Ending Inventory 38,000 20060000 Cost of goods sold 134,500 68272500 Break-up & value of Ending Inventory Units at Value 20000 535 10700000 18000 520 9360000 38000 20060000 Adjusting Journal Entries Account Title Debit Credit Inventory 85832500 Purchases 85832500 COGS 68272500 Inventory 68272500 Year End.Inv.value at Year-end prices Price Index Inventory at base yr. prices Change from previous yr. Dollar Value Inventory at end 2016 2015 2500000 100 2500000 0 2500000 2016 20060000 107 18747663.6 16247663.6 17385000 Total value at end 2016 19885000 Layer formed,16247663*1.07=17385000 FIFO DVLIFO Difference Goods available for sale(Beg.Inv. +Purchases) 88332500 88332500 0 Ending Inventory 20060000 19885000 175000 COGS 68272500 68447500 -175000 Adj. Journal Entries(FIFO to DV LIFO) COGS 175000 Allowance to reduce Inventory 175000 Requirement 5: Balance Sheet line item: FIFO Method DVLIFO Method Balance Sheet Inventory 20060000 19885000 Which method gives higher net income? FIFO
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.