Hamilton Company uses a periodic inventory system. At the end of the annual acco
ID: 2603130 • Letter: H
Question
Hamilton Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 1:
Required:
Compute ending inventory and cost of goods sold for the current year under FIFO, LIFO, and average cost inventory costing methods.
Units Unit Cost Inventory, December 31, prior year 2,000 $ 5 For the current year: Purchase, March 21 6,000 4 Purchase, August 1 4,000 2 Inventory, December 31, current year 3,000Explanation / Answer
Under FIFO periodic inventory system, closing stock consists of latest purchases and cost of goods sold is from oldest purchases
So, Value of inventory of 3,000 units will be from August 1 purchases (latest purchases)
= 3,000 x $2
= $6,000
Cost of goods sold
= Opening Inventory + Value of purchases – Closing Inventory
= 2,000 x $5 + 6,000 x $4 + 4,000 x $2 - $6,000
= $10,000 + $24,000 + $8,000 - $6,000
= $36,000
Under LIFO periodic inventory system, closing stock consists of oldest purchases and cost of goods sold is from latest purchases
So, Value of inventory of 3,000 units will be as follows
2,000 units from opening inventory @ $5 + (3,000 – 2,000) units from March 21 purchases @ $4
= $10,000 + $4,000
= $14,000
Cost of goods sold
= Opening Inventory + Value of purchases – Closing Inventory
= 2,000 x $5 + 6,000 x $4 + 4,000 x $2 - $14,000
= $28,000
Average cost per unit
= Total value of (opening units + Purchases) / Total quantity of (opening units + Purchases)
= (2,000 x $5 + 6,000 x $4 + 4,000 x $2) / (2,000 + 6,000 + 4,000)
= $42,000 / 12,000
= $3.50 per unit
So, value of ending inventory
= 3,000 x $3.50
= $10,500
Cost of goods sold
= Opening Inventory + Value of purchases – Closing Inventory
= 2,000 x $5 + 6,000 x $4 + 4,000 x $2 - $10,500
= $31,500
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