Question

The accounting records of Wall's China Shop reflected the following balances as of January 1, Year 2:

Cash	$	17,500
Beginning inventory		13,350	(150 units @ $89)
Common stock		14,100
Retained earnings		16,750

The following five transactions occurred in Year 2:

1. First purchase (cash) 120 units @ $91
2. Second purchase (cash) 195 units @ $99
3. Sales (all cash) 425 units @ $186
4. Paid $14,500 cash for salaries expenses.
5. Paid cash for income tax at the rate of 40 percent of income before taxes.

Required
a. Compute the cost of goods sold and ending inventory, assuming (1) FIFO cost flow, (2) LIFO cost flow, and (3) weighted-average cost flow. Compute the income tax expense for each method.
b. Record the above transactions in general journal form and post to T-accounts assuming (1) FIFO cost flow, (2) LIFO cost flow, and (3) weighted-average cost flow. Assume perpetual inventory system is used.
1. FIFO
2. LIFO
3. Weighted Average
c. Use a vertical model to show the Year 2 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average.

Answer 1

1 a) FIFO Cost Flow Method:-

Under FIFO method, goods purchased first are sold first.

Ending Inventory in units = Total units available for sale - Units sold

= (150+120+195) units - 425 units = 40 units

The ending inventory of 40 units under FIFO would be from second purchase at $99 per unit.

Calculation of Cost of goods sold and Cost of Ending Inventory (Amounts in $)

i) Cost of Beginning Inventory (150 units*$89)	13,350
ii) First Purchase Cost (120 units*$91)	10,920
iii) Second Purchase Cost (195 units*$99)	19,305
iv) Total cost of goods available for sale (i+ii+iii)	43,575
v) Cost of Ending Inventory (40 units*$99)	3,960
vi) Cost of goods sold (iv-v)	39,615
vii) Sales Revenue (425 units*$186)	79,050
viii) Gross Profit (vii - vi)	39,435
ix) Salaries expense	14,500
x) Profit before income tax (viii - ix)	24,935
xi) Income Tax Expense (x*40%)	9,974

1 b) LIFO Cost Flow Method:-

Under LIFO method, goods purchased last are sold first.

The ending inventory of 40 units under LIFO would be from beginning inventory at $89 per unit.

Calculation of Cost of goods sold and Cost of Ending Inventory (Amounts in $)

A) Total cost of goods available for sale	43,575
B) Cost of Ending Inventory (40 units*$89)	3,560
C) Cost of goods sold (A-B)	40,015
D) Sales Revenue (425 units*$186)	79,050
E) Gross Profit (D-C)	39,035
F) Salaries expense	14,500
G) Profit before income tax (E-F)	24,535
H) Income Tax Expense (G*40%)	9,814

1) c) Weighted Average Cost Flow Method:-

Under weighted average cost method, weighted average cost is used for calculating cost of goods sold and cost of ending inventory. Weighted average cost is equal to total cost of goods available for sale divided by units available for sale.

Weighted Average Cost per unit = Total cost of goods available for sale/Total units available for sale

= $43,575/465 units = $93.7019677 per unit

Calculation of Cost of goods sold and Cost of Ending Inventory (Amounts in $)

A) Total cost of goods available for sale	43,575
B) Cost of Ending Inventory (40 units*$93.7019677)	3,748
C) Cost of goods sold (A-B)	39,827
D) Sales Revenue (425 units*$186)	79,050
E) Gross Profit (D-C)	39,223
F) Salaries expense	14,500
G) Profit before income tax (E-F)	24,723
H) Income Tax Expense (G*40%)	9,889

b) 1) FIFO Cost Flow Method:-

Journal Entries (Amounts in $)

No	Account Titles and Explanations	Debit	Credit
I)	Inventory	10,920
	Cash		10,920
	(To record the inventory purchased)
II)	Inventory	19,305
	Cash		19,305
	(To record the inventory purchased)
III)	Cash	79,050
	Sales revenue		79,050
	(To record the cash sales)
IV)	Cost of Goods Sold	39,615
	Inventory		39,615
	(To record the cost of goods sold)
V)	Salaries Expense	14,500
	Cash		14,500
	(To record the salaries expense)
VI)	Income tax expense	9,974
	Cash		9,974
	(To record the income tax expense)

b) 2) LIFO Cost Flow Method:-

Journal Entries (Amounts in $)

No	Account Titles and Explanations	Debit	Credit
I)	Inventory	10,920
	Cash		10,920
	(To record the inventory purchased)
II)	Inventory	19,305
	Cash		19,305
	(To record the inventory purchased)
III)	Cash	79,050
	Sales revenue		79,050
	(To record the cash sales)
IV)	Cost of Goods Sold	40,015
	Inventory		40,015
	(To record the cost of goods sold)
V)	Salaries Expense	14,500
	Cash		14,500
	(To record the salaries expense)
VI)	Income tax expense	9,814
	Cash		9,814
	(To record the income tax expense)

b) 3) Weighted Average Cost Flow Method:-

Journal Entries (Amounts in $)

No	Account Titles and Explanations	Debit	Credit
I)	Inventory	10,920
	Cash		10,920
	(To record the inventory purchased)
II)	Inventory	19,305
	Cash		19,305
	(To record the inventory purchased)
III)	Cash	79,050
	Sales revenue		79,050
	(To record the cash sales)
IV)	Cost of Goods Sold	39,827
	Inventory		39,827
	(To record the cost of goods sold)
V)	Salaries Expense	14,500
	Cash		14,500
	(To record the salaries expense)
VI)	Income tax expense	9,889
	Cash		9,889
	(To record the income tax expense)