Question

CC7-1 Accounting for Changing Inventory Costs [LO7-3, LO7-5]In October, Nicole of Nicole’s Getaway Spa (NGS) eliminated all existing inventory of cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could manage a single product line, Nicole agreed. NGS would make monthly purchases from the supplier at a cost that included production costs and a transportation charge. The spa would use a perpetual inventory system to keep track of its new inventory.On December 31, NGS purchased 10 units at a total cost of $8.50 per unit. NGS purchased 30 more units at $10.50 in February, but returned 5 defective units to the supplier. In March, NGS purchased 15 units at $12.50 per unit. In May, 50 units were purchased at $12.50 per unit; however, NGS took advantage of a 3.00/10, n/30 discount from the supplier. In June, NGS sold 50 units at a selling price of $11.40 per unit and 35 units at $9.40 per unit.Required: 1. State whether the transportation cost included in each purchase should be recorded as a cost of the inventory or immediately expensed. Immediately expensed O Inventory cost 2. Compute the Cost of Goods Available for Sale, Cost of Goods Sold, and Cost of Ending Inventory using the first-in, first-out (FIFO) method. (Do not round intermediate calculations. Round final answers to the nearest dollar amount.) Cost of goods available for sale Cost of goods sold Cost of ending inventory

Answer 1

1. The transportation cost included in each purchase should be recorded as a cost of the inventory.

2. Cost of Goods Available for Sale (FIFO) = $1141.25

Cost of Goods Sold (FIFO) is $535.00

Cost of Ending Inventory (FIFO) is $606.

1. The transportation cost should be recorded as a cost of the inventory because it is an integral part of acquiring the inventory and bringing it to the spa's location, directly impacting the total cost of the inventory.

This aligns with generally accepted accounting principles (GAAP) for including all costs necessary to get the inventory ready for sale in the inventory's cost.

2. Cost of Goods Available for Sale (FIFO):

Total Cost = (10 * $8.50) + (25 * $10.50) + (15 * $12.50) + (50 * $12.50) - (625*3%)

= $1141.25

Cost of Goods Sold (FIFO):

Cost of 50 units sold in June = (10 units * $8.50) + (25 units * $10.50) + (15 units * $12.50) = $85 + $262.50 + $187.50

= $535.00

Cost of Ending Inventory (FIFO):

= $1141 - $535

= $606