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

Pappa’s Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, 2014, purchases invoices during the year, and the inventory count at December 31, 2014, 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, 2014, 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, 2014, by the last-in, first-out
method, following the procedures indicated in (1).

3. Determine the cost of the inventory on December 31, 2014, 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:






3. Weighted Average Cost Method
Model Quantity Unit Cost* Total Cost
C55 4 $1,056 $ 4,224
D11 11 654 7,194
F32 2 252 504
H29 4 311 1,244
K47 8 534 4,272
S33 2 227 454
X74 7 37 259
Total $18,151
* 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 a lesser amount of net income than the other two methods. For Pappa’s Appliances, the LIFO method would be preferred for the current year, since it would result in a lesser amount of income tax.

b. During periods of declining prices, the FIFO method will result in a lesser amount of net income and would be preferred for income tax purposes.

1. First-In, First-Out Method
Model Quantity Unit Cost Total Cost
C55 3
1
$1,070
1,060
$ 3,210
1,060
D11 6
5
675
666
4,050
3,330
F32 1
1
280
260
280
260
H29 4 317 1,268
K47 6
2
542
549
3,252
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
$1,040
1,054
$ 3,120
1,054
D11 9
2
639
645
5,751
1,290
F32 2 240 480
H29 4 305 1,220
K47 6
2
520
531
3,120
1,062
S33 2 222 444
X74 4
3
35
36
140
108
Total $17,789