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MASTERY PROBLEM ,250Hurst Companys beginning inventory and purchases during the fiscal year end December 31, 20-2, were as follows: Units 1,500 500 Unit Price Total Cost January 1, 20-2 January 12 February 28 June 29 August 31 October 29 November 30 December 2:1 Beginning inventory 1st purchase 2nd purchase 3rd purchase 4th purchase 5th purchase 6th purchase 7th purchase $10.00 $15,000 5,750 8,700 15.00 18,000 16.50 13,200 5,400 18.50 12,950 8,000 $87,000 11.50 14.50 1,200 800 300 18.00 400 20.00 There are 1,200 units of inventory on hand on December 31, 20-2. REQUIRED and 1. Calculate the total amount to be assigned to the cost of goods sold for 20-2 ending inventory on December 31 under each of the following periodic inventor methods: (a) FIFO (b) LIFO (c) Weighted-average (round calculations to two decimal places) (continued)
for a Mercha 2. Assume that the market price per unit (cost to replace) of Hursts inventory on mber 31 was $18. Calculate the total amount to be assigned to the ending inventory on December 31 under each of the following methods: (a) FIFO lower-of-cost-or-market (b) Weighted-average lower-of-cost-or-market 3. In addition to taking a physical inventory on December 31, Hurst decides to estimate the ending inventory and cost of goods sold. During the fiscal year ended December 31, 20-2, net sales of $100,000 were made at a normal gross profit rate of 35%. Use the gross profit method to estimate the cost of goods sold for the fiscal year ended December 31 and the inventory on December 31 CHALLENGE PROBLEM
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Ans 1 (a) Periodic Inventory System: In this system, the cost of sales and inventory are determined as the end of the accounting period First in, first out method (FIFO) In this method it is assumed that Inventory which is purchased first will be sold first and the inventory will consist of recent purchases. Inventory Value Particulars 7th Purchase 6th Purchase 5th Purchase Total Cost of Good Sold Total Purchases Less Closing Invento Cost of Good Sold Date December 21 November 30 October 29 Units Cost 400.00 700.00 100.00 1,200.00 Total $20.00$8,000.00 $18.50 $12,950.00 $18.00 $1,800.00 $22,750.00 $87,000.00 $22,750.00 $64,250.00 Ans 1 (b) Last in, first out method (LIFO): In this method it is assumed that Inventory which is purchased last wil be sold first and the inventory will consist of old purchases Inventory Value Particulars Beginning Invento Total Cost of Good Sold Total Purchases Less: Closing Inventory Cost of Good Sold Units Cost Total January 1, 20-2 $10.00 $12,000.00 1,200.00 1,200.00 $12,000.00 $87,000.00 $12,000.00 $75,000.00Ans 1 (c) In weighted average cost method per unit purchase is derived by adding cost of opening inventory and purchase made during the year and then dividing it by the adding the units of opening inventory and units purchased during the year Weighted Average CostTotal cost of goods available for sale/Total units available for sale Weighted Average Cost[$87000/6000] Inventory Value Cost of Good Sold $14.50 $17,400.00 $69,600.00 [1200 x $14.50] [4800 x $14.50] Ans 2 The ending inventory is valued at cost or market price whichever is lower. This method is called as Lower Cost or Market (LCM) Market price per unit is $18 Particulars Market a FIFO Lower of cost or market blWeighted Average Lower of cost or market Cost $ 22,750.00 [1200 x $18] $21,600.00 $ $ 17,400.00 1200 x $18] $21,600.00 $ Lower of cost or market 21,600.00 17,400.00 Ans 3 Gross Profit method is a method in which ending inventory and cost of good sold is valued based on the gross profit of the business Gross Profit (Sales Cost of Good Sold)/Sales 35%-($100000-Cost of Good Sold)/$100000 Cost of Good Sold-$100000-$100000 x 35% Cost of Good Sold $100000 $35000 Cost of Good Sold $65000 Ending Inventory Cost of Good Available for Sale Ending Inventory $87000 $65000 Ending inventory = $22000 Cost of Good Sold

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