Question

PART II (20 Points) Information related to T Company's inventory for 2018 is as follows: 1/1/18 Beginning Inventory Purchases 4/1/18 8/25/18 400 units@ $10 800 units @ $10.40 600 units@ $10.80 200 units@$11.60 12/3/18 A physical count revealed that 550 units remained in stock at 12/31/18. INSTRUCTIONS: A) Show computations to value ending inventory under the FIFO, LIFO and weighted average methods. B) How much is cost of goods sold under each method? C) For whom would it be advantageous to use the LIFO method and for whom would the FIFO method be better? Explain your answer. PART III (20 Points) A) E Company purchased a truck for $35,000 on 1/1/18. Its estimated useful life is 5 years and it has a salvage value of $2,000. E Company uses the double declining balance method of depreciation. Prepare a schedule showing how depreciation would be computed over the useful life of the truck. B) Assume the truck was sold on 1/1/20 for $15,000. Prepare a journal entry for the sale of the truck.

Answer 1

Part II:

Answer A:

Ending Inventory = 550 units

Under FIFO ending inventory will be valued based on latest purchases

FIFO Ending inventory = 200 * 11.60 + 350 * 10.80 = $6,100

Under LIFO ending inventory will be based beginning inventory and (if required) based earliest purchases.

LIFO Ending inventory = 400 * 10 + 150 * 10.40 = $5,560

To calculate Weighted average cost let us first calculate total units and cost of goods available for sale:

Units Cost per unit Total cost Beginning Invento $10.00 $4,000 400 Date 1/1/18 Puchases 4/1/18 $10.40 $8,320 $6,480 800 8/25/18 $10.80 600 12/3/18 $2,320 $17,120 $11.60 200 2,000Cost of goods available for sales $21,120

Weighted average cost per unit = 21120 /2000 = $10.56

Weighted average cost Ending inventory = 550 * 10.56 = $5,808

Hence:

FIFO Ending inventory = $6,100

LIFO Ending inventory = $5,560

Weighted average cost Ending inventory = $5,808

Answer B:

Cost of goods sold = Cost of goods available for sale - Ending Inventory

Cost of Goods sold under each method are as follows:

Ending Inventory Cost of Goods Sold $6,100 Cost of goods available for sales $21,120 $21,120 $15,020 FIFO $15,560 $15,312 $5,560 LIFO Weighted Average $21,120 $5,808

Answer C:

When prices are rising, FIFO will result in higher inventory (lower cost of goods sold, higher net income) and LIFO will result in lower inventory (higher cost of goods sold, lower net income).

When prices are falling FIFO will result in lower inventory (higher cost of goods sold, lower net income) and FIFO will result in higher inventory (lower cost of goods sold, higher net income)

To get higher net income when prices are rising FIFO will be useful and to get lower net income LIFO will be useful.

Part III:

Answer A:

Double Declining rate = 2 * straight line rate = 2 * 1 / Useful Life = 2/ 5 = 40%

Depreciation $14,000 Book value at beginning of year $35,000 Accumulated Depreciation Year ending Book value $21,000 Year $14,000 1 $21,000 $8,400 $22,400 $27,440 $12,600 2. $12,600 $5,040 $7,560 $4,536 $2,722 3 $7,560 $4,536 $3,024 $30,464 $32,278 $1,814 5 LC

Answer B:

As on 1/1/20 Book value = $12,600

Debit Account Title Credit Date 1/1/20 Cash $15,000 Accumulated Depreciation $22,400 $35,000 $2,400 Vehicle Profit on sales of Truck (to record sale of truck and profit on sale)