Pappa’s Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the year, and the inventory count at December 31 are summarized as follows:
Purchases Invoices Model Inventory, January 1 1st 2nd 3rd Inventory Count, December 31 C55 3 at $1,040 3 at $1,054 3 at $1,060 3 at $1,070 4 D11 9 at 639 7 at 645 6 at 666 6 at 675 11 F32 5 at 240 3 at 260 1 at 260 1 at 280 2 H29 6 at 305 3 at 310 3 at 316 4 at 317 4 K47 6 at 520 8 at 531 4 at 549 6 at 542 8 S33 — 4 at 222 4 at 232 — 2 X74 4 at 35 6 at 36 8 at 37 7 at 39 7
Instructions
1. Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings:
Model | Quantity | Unit Cost | Total Cost
If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase.
2. Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1).
3. Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1).
4. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.
Answer:
1. First-In, First-Out Method
Model Quantity Unit Cost Total Cost
C55 3 $1,070 $ 3,210
1 1,060 1,060
D11 6 675 4,050
5 666 3,330
F32 1 280 280
1 260 260
H29 4 317 1,268
K47 6 542 3,252
2 549 1,098
S33 2 232 464
X74 7 39 273
Total$18,545
2. Last-In, First-Out Method
Model Quantity Unit Cost Total Cost
C55 3 $1,040 $ 3,120
1 1,054 1,054
D11 9 639 5,751
2 645 1,290
F32 2 240 480
H29 4 305 1,220
K47 6 520 3,120
2 531 1,062
S33 2 222 444
X74 4 35 140
3 36 108
Total$17,789
3. Weighted Average Cost Method
Quantity Unit Cost* Total Cost
4 $1,056 $ 4,224
11 654 7,194
2 252 504
4 311 1,244
8 534 4,272
2 227 454
7 37 259
* Computations of unit costs:
C55: $1,056 = [(3 × $1,040) + (3 × $1,054) + (3 × $1,060) + (3 × $1,070)] ÷ (3 + 3 + 3 + 3)
D11: $654 = [(9 × $639) + (7 × $645) + (6 × $666) + (6 × $675)] ÷ (9 + 7 + 6 + 6)
F32: $252 = [(5 × $240) + (3 × $260) + (1 × $260) + (1 × $280)] ÷ (5 + 3 + 1 + 1)
H29: $311 = [(6 × $305) + (3 × $310) + (3 × $316) + (4 × $317)] ÷ (6 + 3 + 3 + 4)
K47: $534 = [(6 × $520) + (8 × $531) + (4 × $549) + (6 × $542)] ÷ (6 + 8 + 4 + 6)
S33: $227 = [(4 × $222) + (4 × $232)] ÷ (4 + 4)
X74: $37 = [(4 × $35) + (6 × $36) + (8 × $37) + (7 × $39)] ÷ (4 + 6 + 8 + 7)
4. a. During periods of rising prices, the LIFO method will result in a lower cost
of inventory, a greater amount of cost of merchandise sold, and less net
income than the other two methods. For Pappa’s Appliances, the LIFO
method would be preferred for the current year because it would result in
less income tax.
b. During periods of declining prices, the FIFO method will result in less net
income and would be preferred for income tax purposes.