Pappa’s Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1

Pappa’s Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the year, and the inventory count at December 31 are summarized as follows:

Purchases Invoices Model Inventory,   January 1 1st 2nd 3rd Inventory Count,  December 31 C55 3 at $1,040 3 at $1,054 3 at $1,060 3 at $1,070 4 D11 9 at      639 7 at      645 6 at      666 6 at      675 11 F32 5 at   240 3 at    260 1 at       260    1 at       280 2 H29 6 at  305 3 at       310 3 at       316 4 at      317 4 K47 6 at  520 8 at       531 4 at       549 6 at     542 8 S33 — 4 at       222 4 at       232 — 2 X74 4 at   35 6 at          36 8 at          37 7 at    39 7

Instructions

1.  Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings:

Model | Quantity | Unit Cost | Total Cost

  If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase.

2.  Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1).

3.  Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1).

4.  Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.

Answer:

1. First-In, First-Out Method

Model Quantity Unit Cost Total Cost

C55 3 $1,070 $ 3,210

1 1,060 1,060

D11 6 675 4,050

5 666 3,330

F32 1 280 280

1 260 260

H29 4 317 1,268

K47 6 542 3,252

2 549 1,098

S33 2 232 464

X74 7 39 273

Total$18,545

2. Last-In, First-Out Method

Model Quantity Unit Cost Total Cost

C55 3 $1,040 $ 3,120

1 1,054 1,054

D11 9 639 5,751

2 645 1,290

F32 2 240 480

H29 4 305 1,220

K47 6 520 3,120

2 531 1,062

S33 2 222 444

X74 4 35 140

3 36 108

Total$17,789

3. Weighted Average Cost Method

Quantity Unit Cost* Total Cost

4 $1,056 $ 4,224

11 654 7,194

2 252 504

4 311 1,244

8 534 4,272

2 227 454

7 37 259

* Computations of unit costs:

C55: $1,056 = [(3 × $1,040) + (3 × $1,054) + (3 × $1,060) + (3 × $1,070)] ÷ (3 + 3 + 3 + 3)

D11: $654 = [(9 × $639) + (7 × $645) + (6 × $666) + (6 × $675)] ÷ (9 + 7 + 6 + 6)

F32: $252 = [(5 × $240) + (3 × $260) + (1 × $260) + (1 × $280)] ÷ (5 + 3 + 1 + 1)

H29: $311 = [(6 × $305) + (3 × $310) + (3 × $316) + (4 × $317)] ÷ (6 + 3 + 3 + 4)

K47: $534 = [(6 × $520) + (8 × $531) + (4 × $549) + (6 × $542)] ÷ (6 + 8 + 4 + 6)

S33: $227 = [(4 × $222) + (4 × $232)] ÷ (4 + 4)

X74: $37 = [(4 × $35) + (6 × $36) + (8 × $37) + (7 × $39)] ÷ (4 + 6 + 8 + 7)

4. a. During periods of rising prices, the LIFO method will result in a lower cost 

of inventory, a greater amount of cost of merchandise sold, and less net

income than the other two methods. For Pappa’s Appliances, the LIFO 

method would be preferred for the current year because it would result in 

less income tax.

b. During periods of declining prices, the FIFO method will result in less net

income and would be preferred for income tax purposes.