Question

E6-6 On December 1, Premium Electronics has three DVD players left in stock. All are identical, all are priced to sell at $85. One of the three DVD players left in stock, with serial #1012, was purchased on June 1 at a cost of $52. Another, with serial #1045, was pur- chased on November 1 for $48. The last player, serial #1056, was purchased on November 30 for $40. Instructions (a) Calculate the cost of goods sold using the FIFO periodic inventory method, assuming that two of the three players were sold by the end of December, Premium Electronics’ year-end. (b) If Premium Electronics used the specific identification method instead of the FIFO method, how might it alter its earnings by "selectively choosing” which particular players to sell to the two customers? What would Premium's cost of goods sold be if the company wished to minimize earnings? Maximize earnings? (c) Which inventory method, FIFO or specific identification, do you recommend that Premium use? Explain why.

Answer 1

(a)

Because FIFO method is being used, the DVD players brought into stock earliest would be sold first. Therefore, the two DVD players sold would be #1012 and #1045.

Cost of goods sold = $52 + $48 = $100

(b)

If specific identification method was used, the company can include the cost of any two of the three DVD players in the cost of goods sold.

If Premium electronics wishes to minimize earnings it would include the DVD players with higher costs in the cost of goods sold.

The cost of goods sold in such case would be $100 ($52 + $48).

If Premium electronics wishes to maximize earnings it would include the DVD players with lower costs in the cost of goods sold.

The cost of goods sold in such case would be $88 ($48 + $40).

(c)

Because if is possible for Premium Electronics to identify the purchase and sale of each DVD player, it should use specific identification method. Under this method, the company would be able to know the actual cost of goods sold and this would help in determining the earnings accurately.