Question

At the beginning of year 2, Arron Company had beginning inventory of 200 units that cost $200 each. During year 2, Arron made two inventory purchases. Purchase one consists of 500 units at a cost of $210. The second purchase consisted of 300 units that cost $220 each. Assuming Benson uses LIFO and sales 800 units of inventory during year 2, calculate the following:

1. cost of goods available for sale
2. cost of goods sold
3. cost of ending inventory

Answer 1

The cost of goods available for sale for Arron Company is $211,000. The cost of goods sold under the LIFO method is $108,000. Consequently, the cost of the ending inventory is $103,000.

Step-by-step explanation:

To calculate the cost of goods available for sale, we must add together the cost of beginning inventory and the cost of purchases made during the year. Arron Company started with 200 units at $200 each, which totals to $40,000. Then, two purchases were made: 500 units at $210 each ($105,000) and 300 units at $220 each ($66,000). Adding them up gives us:

$40,000 + $105,000 + $66,000 = $211,000

Therefore, the cost of goods available for sale is $211,000.

Under the Last-In, First-Out (LIFO) method, the most recently acquired items are sold first. Arron sold 800 units during the year. Since the last purchase was of 300 units at $220, we start with those. Then we move to the 500 units bought at $210, and we will use as many as needed to reach 800 units sold. The calculation for cost of goods sold is as follows:

300 units (from last purchase) × $220 = $66,000
500 units sold - remaining 300 units = 200 units to count (from second last purchase) × $210 = $42,000
So the cost of goods sold is $66,000 + $42,000 = $108,000.

To find the ending inventory, we subtract the cost of goods sold from the cost of goods available for sale:

$211,000 (cost of goods available for sale) - $108,000 (cost of goods sold) = $103,000

Thus, the cost of the ending inventory is $103,000.