Question

ABBA uses the perpetual inventory system. The following transactions took place in January 2015. (30 marks,5 marks each )

Units Selling Price/ Date Unit Cost

Jan. 1                           unit                          Units Selling Price/ Date Unit Cost         

Opening Inventory     2,000                                      $0.50

5 Sale #1                  1,200                                         5.00

6 Purchase #1           1,000                                          2.00

10 Purchase #2           500                                          1.00

16 Sale #2                 2,000                                            6.00

21 Purchase #3         1,000                                           2.50

Assume all sales are made on account。

Required: 1. Assume ABBA uses the FIFO inventory cost flow assumption a. Record the journal entry for the January 5 sale. Show calculations for cost of goods sold. b. Record the journal entry for the January 16 sale. Show calculations for cost of goods sold. c. Calculate ending inventory in units, cost per unit, and total cost. 2. Assume ABBA uses the weighted average inventory cost flow assumption a. Record the journal entry for the January 5 sale. Show calculations for cost of goods sold. b. Record the journal entry for the January 16 sale. Show calculations for cost of goods sold. c. Calculate ending inventory in units, cost per unit, and total cost.

Answer 1

	1. FIFO inventory system
	Journal entries;
Date	Account's tittle	Debit $	Credit $
5-Jan	Accounts Receivable ( 1,200 units x $ 5 )	6,000
	Sales Revenue		6,000
	( To be record sales on account )
5-Jan	Cost of goods sold   ( 1,200 units x $ 0.50 )	600
	Inventory		600
	( To be record cost of goods sold based on FIFO method )
16-Jan	Accounts Receivable ( 2,000 units x $ 6 )	12,000
	Sales Revenue		12,000
	( To be record sales on account )
16-Jan	Cost of goods sold   {(800 x $ 0.50 ) + (1,000 x $ 2) + (200 x $ 1 )}	2,600
	Inventory		2,600
	( To be record cost of goods sold based on FIFO method )
31-Jan	Ending Inventory	$
	300 units x $ 1 per unit	300
	1,000 units x $ 2.5 per unit	2,500
	Ending Inventory ( 1,300 units )	2,800
	2. Weighted Average inventory cost method;
	Journal entries;
Date	Account's tittle	Debit $	Credit $
5-Jan	Accounts Receivable ( 1,200 units x $ 5 )	6,000
	Sales Revenue		6,000
	( To be record sales on account )
5-Jan	Cost of goods sold   ( 1,200 units x $ 0.50 )	600
	Inventory		600
	( To be record cost of goods sold based on FIFO method )
16-Jan	Accounts Receivable ( 2,000 units x $ 6 )	12,000
	Sales Revenue		12,000
	( To be record sales on account )
16-Jan	Cost of goods sold   {2,000 units x $ 1.26}	2,520
	Inventory		2,520
	( To be record cost of goods sold based on FIFO method )
	Computation of average cost;
	Opening inventory ( 2,000 units x $ 0.50 )	1,000
	Cost of goods sold on January 5 sale ( 1,200 units x $ 0.50 )	(600)
	Purchase of 1,000 units at a rate $ 2 per unit	2,000
	Purchase of 500 units at a rate $ 1 per unit	500
	Total 2,300 units	2,900
	Average cost per unit ( $ 2,900 / 2,300 units ) = $ 1.26 per unit
31-Jan	Ending Inventory	$
	(2,300 units - 2,000 units ) x $ 1.26 per unit	378
	1,000 units x $ 2.5 per unit	2,500
	Ending Inventory ( 1,300 units )	2,878
	cost per unit ( $ 2,878 / 1,300 units ) = $ 2.21 per unit