Question

Fossil specializes in designer watches and leather goods. Assume Fossil began June holding 10 wristwatches that cost $50 each. During June, Fossil bought and sold inventory as follows: Jun 3 16 23 Sold 8 units for $100 each Purchased 10 units @ $56 each Sold 8 units for $100 each Requirements 1. Prepare a perpetual inventory record for Fossil using FIFO, LIFO, and Average cost. 2. Journalize all of Fossil's inventory transactions for June under all three costing methods. 3. Show the computation of gross profit for each method. 4. Which method maximizes net income? Which method minimizes income taxes?

Answer 1

FIFO		Inventory Balance			Cost of goods sold			Inventory Balance
		Unit	Rate per unit	Total	Unit	Rate per unit	total	Unit	Rate per unit	Total
June	Opening balance	10	50	500				10	50	500
3rd June	Sales (8units@$100)				8	50	400	2	50	100
16th June	Purchases	10	56	560				2	50	100
								10	56	560
23rd June	Sales (8units@$100)				2	50	100
					6	56	336	4	56	224
	Ending Balance							4	56	224
	Total	20		1060	16		836	4		224

LIFO		Inventory Balance			Cost of goods sold			Inventory Balance
		Unit	Rate per unit	Total	Unit	Rate per unit	Total	Unit	Rate per unit	Total
June	Opening balance	10	50	500				10	50	500
3rd June	Sales (8units@$100)				8	50	400	2	50	100
16th June	Purchases	10	56	560				2	50	100
								10	56	560
23rd June	Sales (8units@$100)				8	56	448	2	50	100
								2	56	112
	Ending Balance							2	50	100
								2	56	112
	Total	20		1060	16		848	4		212

Average Cost		Inventory Balance			Cost of goods sold			Inventory Balance
		Unit	Rate per unit	total	Unit	Rate per unit	total	Unit	Rate per unit	total
June	Opening balance	10	50	500				10	50	500
3rd June	Sales (8units@$100)				8	50	400	2	50	100
16th June	Purchases	10	56	560				2	50	100
								10	56	560
23rd June	Sales (8units@$100)				8	55	440	4	55	220
	Ending Balance							4	55	220
	Total	20		1060	16		840	4		220

Journal entries

		FIFO		LIFO		Avg.Cost
Date	Particulars	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.
3rd June	Accounts Receivable	800		800		800
	Sales		800		800		800
	sold merchandise on account (8*$100)
3rd June	Cost of goods sold	400		400		400
	Inventory		400		400		400
	to record the cost of merchandise sold
16th June	Inventory	560		560		560
	Accounts Payable		560		560		560
	purchased inventory on account (10*$56)
23rd June	Accounts Receivable	800		800		800
	Sales		800		800		800
	sold merchandise on account (8*$100)
23rd June	Cost of goods sold	436		448		440
	Inventory		436		448		440
	to record the cost of merchandise sold

gross profit

	FIFO	LIFO	Avg.Cost
Sales	1,600	1,600	1,600
Less: Cost of goods sold	836	848	840
Gross Profit	764	752	760

FIFO method maximizes net income

LIFO method minimizes the income tax