Question

rion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31. Transactions Units Unit Cost a. Inventory, Beginning 300 $ 14 For the year: b. Purchase, April 11 950 12 c. Purchase, June 1 850 15 d. Sale, May 1 (sold for $42 per unit) 300 e. Sale, July 3 (sold for $42 per unit) 630 f. Operating expenses (excluding income tax expense), $18,200 Required: 1. Calculate the number and cost of goods available for sale. 2. Calculate the number of units in ending inventory. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost. 4. Prepare an income statement that shows under the FIFO method, LIFO method and weighted average method. 6. Which inventory costing method minimizes income taxes

Answer 1

1. 2,100 units and $28,350

2. 1,170 units

3.

Cost of ending inventory Cost of goods sold

a. FIFO $16,590 $11,760

b. LIFO $15,300 $13,050

c. Weighted Average $12,093 $12,492

4.

Income Statement for the year ended December 31

FIFO LIFO Weighted Average

Sales ($12,600 + $ 26,460) $39,060 $39,060 $39,060

Cost of Goods Sold ($11,760) ($13,050) ( $12,492)

Gross Profit $27,300 $26,010 $26,568

Less Expenses ($18,200) ($18,200) ($18,200)

Net Income / (Loss) $9,100 $7,810 $8,368

5. No Data

6. LIFO

Step-by-step explanation:

Periodic Method means that inventory valuation is done after a specific period. In this case valuation is being done at year end.

Calculation of the number and cost of goods available for sale

Units Total Costs

Beginning Inventory 300 $4,200

Add Purchases :

April 11 950 $11,400

June 1 850 $12,750

Available for Sale 2,100 $28,350

Ending Inventory units = Units Available for Sale - Units Sold

= 2,100 units - 300 units - 630 units

= 1,170 units

a. FIFO

FIFO stands for First In First Out.

i. Cost of ending inventory

320 units × $12 = $3,840

850 units × $15 = $12,750

Total = $16,590

ii. Cost of goods sold

300 units × $14 = $4,200

630 units × $12 = $7,560

Total = $11,760

b. LIFO

LIFO stands for Last In Last Out

i. Cost of ending inventory

300 units × $14 = $4,200

650 units × $12 = $7,800

220 units × $15 = $3,300

Total = $15,300

ii. Cost of goods sold

300 units × $12 = $3,600

630 units × $15 = $9,450

Total = $13,050

c. weighted average cost

This method recalculates the unit costs after every purchase. Sales are valued at the latest unit costs calculated.

1st calculation : April 11

Unit Cost = Total Cost ÷ Total Number of Units

= ((950 units × $12) + (300 units × $14)) ÷ (1,250)

= $12.45

Sale = 300 × $12.45

= $3,735

2nd Calculation : June 1

Unit Cost = Total Cost ÷ Total Number of Units

= ((650 units × $12.45) + (850 units × $15)) ÷ (1,500)

= $13.90

Sale = 630 × $13.90

= $8,757

ii. Cost of goods sold

Total Cost of Goods Sold = $3,735 + $8,757

= $12,492

i. Cost of ending inventory

Ending Inventory = 870 × $13.90

= $12,093