Question

The accounting records of Wall's China Shop reflected the following balances as of January 1, Year 2: $ 18,900 Cash Beginning inventory Common stock Retained earnings 12,325 (145 units @ 12,325 $85) 14,200 17,025 The following five transactions occurred in Year 2: 1. First purchase (cash) 120 units @ $87 2. Second purchase (cash) 195 units @ $95 3. Sales (all cash) 415 units @ $192 4. Paid $15,950 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

Workings

Walls' China Shop Inventory sheet-FIFO Date Decription Beginning Inventory 1st Purchase 2nd Purchase Goods Available For Sale Ending Inventory Cost of Goods Sold Quantity Cost per unit Total cost Calculation 145 $ 85.00 $ 12,325 120 $ 87.00 $ 10,440 195 $ 95.00 $ 18,525 460 41,290 45 $ 95.00 4,275 -415-460 = 45 units ending inventory 415 37,015 in FIFO, latest purchases of $95 per unit to value inventory Inventory sheet -LIFO Date Decription Beginning Inventory 1st Purchase 2nd Purchase Goods Available For Sale Ending Inventory Cost of Goods Sold Quantity 145 120 195 460 45 415 Cost per unit Total cost $ 85.00 $ 12,325 $ 87.00 $ 10,440 $ 95.00 $ 18,525 $ 41,290 $ 85.00 3,825 37,465 In LIFO, oldest purchases of $85 per unit to value inventory -41,290 - 3,825 = 37,465 Inventory sheet - Average weighted cost Date Decription Quantity Beginning Inventory 145 1st Purchase 120 2nd Purchase 195 Goods Available For Sale 460 Ending Inventory 45 Cost of Goods Sold 415 Cost per unit Total cost $ 85.00 $ 12,325 $ 87.00 $ 10,440 $ 95.00 $ 18,525 $ 89.76 $ 41,290 Weighted avg cost per unit = 41,290/460 = $89.76 per unit $ 89.76 $ 4,039 =165 units *$92.11 = $15,199 37,251 =41,290 - 4,039 = 37,251

Walls' China Shop Reg A FIFO Cost of goods sold Ending Inventory Income tax expense 37,015 4,275 10,686 LIFO 37,465 3,825 10,506 Calculation Average cost 37,251 4,039 10,592 As per income statement below FIFO LIFO -415*192 Average cost =415*192 Req C1 Income Statement Sales Cost of goods sold Gross Margin Salaries expense Income before tax Income tax expenses Net Income 79,680 37,015 42,665 15,950 26,715 10,686 16,029 LIFO 79,680 37,465 42,215 15,950 26,265 10,506 15,759 Calculation Average cost FIFO 79,680 -415*192 37,251 Workings 42,429 15,950 26,479 10,592 = 26,715*40% 15,888 = 26,265*40% =26,479*40% FIFO Req C2 Balance Sheet Cash Inventory Total Assets 42,979 4,275 47,254 LIFO 43,159 3,825 46,984 Average cost 43,073 T Accounts 4,039 T Accounts 47,113 Common Stock Retained Earnings Total Equity 14,200 33,054 47,254 14,200 32,784 46,984 14,200 32,913 47,113 T Accounts T Accounts FIFO LIFO Average cost Req C3 Cashflow Statement Cashflow from Operating Activities Cash paid for first purchase Cash paid for second purchase Cash receipts from sales Cash paid for salaries expense Cash paid for income tax expense Net Cashflow from Operating Activities Cashflow from Investing Activities Cashflow from Financing Activities Net Change in Cash Beginning cash balance Ending cash balance (10,440) (18,525) 79,680 (15,950) (10,686) 24,079 (10,440) (18,525) 79,680 (15,950) (10,506) 24,259 (10,440) (18,525) 79,680 (15,950) (10,592) 24,173 24,079 18,900 42,979 24,259 18,900 43,159 24,173 18,900 43,073

Req B - Journal entries and T Accounts

Walls' China Shop Journal entries - FIFO Date Account 1 Merchandise Inventory Cash Debit $ 10,440 $ 10,440 $ 18,525 Merchandise Inventory Cash $ 18,525 3 $ 79,680 Cash Sales Revenue $ 79,680 $ 37,015 Cost of goods sold Merchandise Inventory $ 37,015 5 $ 15,950 Salaries expense Cash $ 15,950 $ 10,686 Income tax expense Cash $ 10,686

Credit Date Date Credit Date Credit Walls' China Shop T Accounts - FIFO Date Debit Date Cash Op bal $ 18,900 1 3 $ 79,680 2 Debit Date Common Stock Op bal $14,200 $ 10,440 $ 18,525 $ 15,950 $ 10,686 Op bal 1 2 Debit Date Credit Merchandise Inventory $ 12,325 $ 10,440 $ 18,525 $ 37,015 CJE2 CJE 2 CJE 2 Debit Date Retained Earnings $ 37,015 Op bal $ 15,950 CE 1 $ 10,686 $17,025 $ 79,680 6 Bal. Bal. $14,200 $ 33,054 $ 42,979 Sales Revenue $ 79,680 3 $ 4,275 Cost of goods sold $ 37,015 CJE 2 Bal. Salaries expense $ 15,950 CJE 2 Bal. Income tax expense $ 10,686 CJE 2 CJE1 $ 79,680 4 $ 37,015 5 $ 15,950 $ 10,686 Bal. $ - Bal. $ - Bal. $ - Bal. $ -

Credit Journal entries -LIFO Date Account Merchandise Inventory Cash Debit $ 10,440 $ 10,440 2 $ 18,525 Merchandise Inventory Cash $ 18,525 3 $ 79,680 Cash Sales Revenue $ 79,680 $ 37,465 Cost of goods sold Merchandise Inventory $ 37,465 5 $ 15,950 Salaries expense Cash $ 15,950 $ 10,506 Income tax expense Cash $ 10,506

Credit Date Date Credit Date Credit Walls' China Shop T Accounts - LIFO Date Debit Date Cash Op bal $ 18,900 1 3 $ 79,680 2 Debit Date Common Stock Op bal $14,200 $ 10,440 $ 18,525 $ 15,950 $ 10,506 Op bal 1 2 Debit Date Credit Merchandise Inventory $ 12,325 $ 10,440 $ 18,525 $ 37,465 CJE2 CJE 2 CJE 2 Debit Date Retained Earnings $ 37,465 Op bal $ 15,950 CE 1 $ 10,506 $17,025 $ 79,680 6 Bal. Bal. $14,200 $ 32,784 $ 43,159 Sales Revenue $ 79,680 3 $ 3,825 Cost of goods sold $ 37,465 CJE 2 Bal. Salaries expense $ 15,950 CJE 2 Bal. Income tax expense $ 10,506 CJE 2 CJE1 $ 79,680 4 5 $ 15,950 6 $ 10,506 Bal. $ - Bal. $ Bal. $ - Bal. $ -

Credit Journal entries - Avg Cost Date Account Merchandise Inventory Cash Debit $ 10,440 $ 10,440 2 $ 18,525 Merchandise Inventory Cash $ 18,525 3 $ 79,680 Cash Sales Revenue $ 79,680 $ 37,251 Cost of goods sold Merchandise Inventory $ 37,251 5 $ 15,950 Salaries expense Cash $ 15,950 $ 10,592 Income tax expense Cash $ 10,592

Credit Date Date Credit Date Credit Walls' China Shop TAccounts - Average Cost Date Debit Date Cash Op bal $ 18,900 1 3 $ 79,680 2 Debit Date Common Stock Op bal $14,200 $ 10,440 $ 18,525 $ 15,950 $ 10,592 Op bal 1 2 Debit Date Credit Merchandise Inventory $ 12,325 $ 10,440 $ 18,525 $ 37,251 CJE2 CJE 2 CJE 2 Debit Date Retained Earnings $37,251 Op bal $ 15,950 CE 1 $ 10,592 $17,025 $ 79,680 6 Bal. Bal. $14,200 $ 32,913 $ 43,073 Sales Revenue $ 79,680 3 $ 4,039 Cost of goods sold $ 37,251 CJE 2 Bal. Salaries expense $ 15,950 CJE 2 Bal. Income tax expense $ 10,592 CIE2 CJE1 $ 79,680 4 $ 37,251 5 $ 15,950 $ 10,592 Bal. $ - Bal. $ - Bal. $ - Bal. $ -