Question

QUESTION 4 (25 POINTS) Deep Creek Boats sells motor boats. One of Deep Creek Motor's most popular models is the Flight. During the current year, they purchased 12 Flights at the following costs. Units Purchased 4 5 Purchase Date Apr. 1 Apr. 19 May 8 Unit Cost $8,000 8,200 Total Cost $32,000 41,000 8,500 25,500 $98,500 12 On April 28, Deep Creek Motors sold five Flights to the Dee Knights racing team. The remaining seven boats remained in inventory at June 30, the end of Deep Creek Motor's fiscal year. Instructions a. Compute (a) the cist of goods sold relating to the sale on April 28 and (b) the ending inventory of Flight boats at June 30, using the following cost flow assumptions. 1. Average cost (round cost to nearest whole dollar). 2. FIFO. 3. LIFO. Show the number of units and the unit costs of each layer comprising the cost of goods sold and ending inventory. b. Using the cost figures computed in part a, answer the following questions: 1. Which of the three cost flow assumptions will result in Deep Creek Motors reporting the lowest net income for the current year? Would this always be the case? Explain.

Answer 1

Cost Data

Purchase date	Unit Cost	Unit purchased	Total Cost
Apr 1	$8000	4	$32000
Apr 19	8200	5	410000
May 8	8500	3	25500

a.(a)

1. Computation of cost under average cost method

Cost of goods sold on 28 Apr

Purchase date	Unit Cost	Unit purchased	Total Cost
Apr 1	$8000	4	$32000
Apr 19	8200	5	410000
Total		9	73000

Avg Cost per unit= Total cost of both date / No of Quantity Purchased

= $73000/9 = $8111

Cost of goods sold for 5 unit = $8111*5 = $40555

a(b)(1)Cost of ending inventory under avg method= $57944

Date	unit	Unit cost	total
Inventory on Apr 19	4	Avg cost= $8111	32444
purchase on may 8	3	8500	25500
Total	7	8278	57944

a(a)(2)

Cost of goods sold under First in First out method on Apr 28

Cost of unit purchased on Apr 1 = 4 units @ $8000 pu = $32000

Cost of unit purchased on Apr 19 = 1 unit @ $8200 pu= $8200

Total cost of goods sold = $40200

a(b)(2)

Cost of inventory under First in First out method on June 30

Inventory of units purchased on Apr 28 = 4 units @ 8200 pu = $ 32800

Inventory of units purchased on May 8 = 3 units @ 8500 pu = $25500

Inventory on June 30 = 7 units at value = $58300

a(a)(3)

Cost of goods sold under Last in First out method on Apr 28

Cost of unit purchased on Apr 19 = 5 units @ $8200 pu = $41000

Total cost of goods sold = $41000

a(b)(3)

Cost of inventory under Last in First out method on June 30

Inventory of units purchased on Apr 1 = 4 units @ 8000 pu = $ 32000

Inventory of units purchased on May 8 = 3 units @ 8500 pu = $25500

Inventory on June 30 = 7 units at value = $57500

b(1)

LIFO method would result in reporting lowest net income for the current year out of three cost flow assumption

Cost per unit of Ist lot is lower then cost computation under LIFO would result in higher reporting of net income. So it will not always be the case.