Financial & Managerial Accounting
Financial & Managerial Accounting
18th Edition
ISBN: 9781259692406
Author: Jan Williams, Susan Haka, Mark S Bettner, Joseph V Carcello
Publisher: McGraw-Hill Education
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Chapter 8, Problem 1BP

a.

To determine

Prepare the journal entries to record cost of goods sold under (1) specific identification method, (2) average-cost method, (3) FIFO method, and (4) LIFO method, and discuss the financial reporting differences that may arise from choosing the FIFO method over the LIFO method.

a.

Expert Solution
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Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.

First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.

Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.

Average Cost method: In this method, the inventories are priced at the average rate of goods available for sales.

Prepare the journal entries to record cost of goods sold under specific identification method as follows:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (1) $14,800 
 Inventory  $14,800
 (To record the cost of goods sold incurred)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $14,800. Therefore, debit cost of goods account with $14,800.
  • Inventory is an asset account, and it decreases the value of assets by $14,800. Therefore, credit inventory account with $14,800.

Working note:

Calculate the value of cost of goods sold under separate identification method

Financial & Managerial Accounting, Chapter 8, Problem 1BP , additional homework tip  1

Table (2)

(1)

Prepare the journal entries to record cost of goods sold under average cost method as follows:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (3) $15,050 
 Inventory  $15,050
 (To record the cost of goods sold incurred)   

Table (3)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $15,050. Therefore, debit cost of goods account with $15,050.
  • Inventory is an asset account, and it decreases the value of assets by $15,050. Therefore, credit inventory account with $15,050.

Working note:

Calculate average cost per unit

Average cost on January 15 }(Total cost of units purchased on December 12 + Total cost of units purchased on January 16)(Number of units purchased on December 12 + Number of units purchased on January 16)=$8,000+ $26,400400 units+ 1,200 units=$34,4001,600 units=$21.5 (2)

Calculate the value of cost of goods sold under average cost method

Financial & Managerial Accounting, Chapter 8, Problem 1BP , additional homework tip  2

Table (4)

(3)

Prepare the journal entries to record cost of goods sold under FIFO method as follows:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (4) $14,600 
 Inventory  $14,600
 (To record the cost of goods sold incurred)   

Table (5)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $14,600. Therefore, debit cost of goods account with $14,600.
  • Inventory is an asset account, and it decreases the value of assets by $14,600. Therefore, credit inventory account with $14,600.

Working note:

Calculate the value of cost of goods sold under FIFO assets

Financial & Managerial Accounting, Chapter 8, Problem 1BP , additional homework tip  3

Table (6)

(4)

Prepare the journal entries to record cost of goods sold under LIFO method as follows:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (5) $15,400 
 Inventory  $15,400
 (To record the cost of goods sold incurred)   

Table (7)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $15,400. Therefore, debit cost of goods account with $15,400.
  • Inventory is an asset account, and it decreases the value of assets by $15,400. Therefore, credit inventory account with $15,400.

Working note:

Calculate the value of cost of goods sold under LIFO assets

Financial & Managerial Accounting, Chapter 8, Problem 1BP , additional homework tip  4

Table (8)

(5)

b.

To determine

Prepare the subsidiary ledger record for Company under the four inventory method valuation.

b.

Expert Solution
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Explanation of Solution

Subsidiary ledger:

Subsidiary ledger refers to the ledger that provides the detailed information of the account already recorded in the general ledger such as accounts receivable subsidiary ledger and accounts payable subsidiary ledger.

Prepare the subsidiary ledger record for Company under the four inventory method valuation as follows:

(1) Specific identification method:

PURCHASEDSOLD BALANCE
DateUnitsUnit CostTotalUnitsUnit CostCost of Goods SoldUnitsUnit CostBalance
Dec 12400208,00040020 8,000
Jan 161,2002226,40040020
1,2002234,400
Jan 223002010020
4002214,8008002219,600

Table (9)

(2) Average-cost method:

PURCHASEDSOLD BALANCE
DateUnitsCostTotalUnitsCostCost of Goods SoldUnitsCostBalance
Dec 12400208,00040020.008,000
Jan 161,2002226,4001,60021.5034,400
Jan 22700$   21.50$ 15,05090021.5019,350

Table (10)

(3) First-in, first-out (FIFO) method:

PURCHASEDSOLD BALANCE
DateUnitsUnit CostTotalUnitsUnit CostCost of Goods SoldUnitsUnit CostBalance
Dec 12400208,00040020$ 8,000
Jan 161,2002226,40040020
1,2002234,400
Jan 2240020
3002214,6009002219,800

Table (11)

(4) Last-in, first-out (LIFO) method:

PURCHASEDSOLD BALANCE
DateUnitsUnit CostTotalUnitsUnit CostCost of Goods SoldUnitsUnit CostBalance
Dec 12400208,00040020 8,000
Jan 161,2002226,40040020
1,2002234,400
Jan 227002215,40040020
5002219,000

Table (12)

c.

To determine

Explain whether the inventory valuation method gives lowest cost of goods sold or not, and the valuation method that gives highest cost of goods sold for the tax purposes.

c.

Expert Solution
Check Mark

Explanation of Solution

Explain whether the inventory valuation method gives lowest cost of goods sold or not, and the valuation method that gives highest cost of goods sold for the tax purposes as follows:

In this case, the cost of goods sold under FIFO and LIFO is $14,600, and $15,400 respectively. Hence, the LIFO method has highest cost of goods sold whereas the FIFO method has the lowest cost of goods sold.

The inventory method that would be preferable for financial statements is FIFO, because FIFO method would produce higher net income, lower cost of goods sold, and higher ending inventory (total assets). At the same time, the higher amount of net income produces the more income tax expense, so LIFO method is preferred for income tax reporting. When a company uses LIFO method it would produce lower amount of tax obligation and higher amount of cash inflow.

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Chapter 8 Solutions

Financial & Managerial Accounting

Ch. 8 - 5. What are the characteristics of a just-in-time...Ch. 8 - 6. Why do companies that use perpetual inventory...Ch. 8 - 7. Under what circumstances might a company write...Ch. 8 - 8. What is meant by the year-end cutoff of...Ch. 8 - 9. Explain why errors in the valuation of...Ch. 8 - 10. Briefly explain the gross profit method of...Ch. 8 - 11. A store using the retail inventory method...Ch. 8 - 12. How is the inventory turnover computed? Why is...Ch. 8 - 13. Baxter Corporation has been using FIFO during...Ch. 8 - In anticipation of declining inventory replacement...Ch. 8 - Notes to the financial statements of two clothing...Ch. 8 - BRIEF EXERCISE 8.1 FIFO Inventory Smalley, Inc.,...Ch. 8 - BRIEF EXERCISE 8.2 LIFO Inventory Mason Company...Ch. 8 - BRIEF EXERCISE 8.3 Average-Cost Inventory Fox...Ch. 8 - BRIEF EXERCISE 8.4 FIFO and LIFO Inventory Murphy,...Ch. 8 - BRIEF EXERCISE 8.5 FIFO and Average-Cost...Ch. 8 - BRIEF EXERCISE 8.6 Inventory Shrinkage Bruing...Ch. 8 - BRIEF EXERCISE 8.7 Inventory Error Pixy, Inc.,...Ch. 8 - BRIEF EXERCISE 8.8 Inventory Error Due to...Ch. 8 - BRIEF EXERCISE 8.9 Inventory Turnover Alamo...Ch. 8 - BRIEF EXERCISE 8.10 Inventory Turnover Rouse...Ch. 8 - EXERCISE 8.1 Accounting Terminology Listed as...Ch. 8 - EXERCISE 8.2 Cost Flow Assumptions On May 10,...Ch. 8 - EXERCISE 8.3 Physical Flow versus Cost Flow...Ch. 8 - EXERCISE 8.4 Effects of Different Cost Flow...Ch. 8 - EXERCISE 8.5 Transfer of Title Jensen Tire had two...Ch. 8 - Prob. 6ECh. 8 - EXERCISE 8.7 Costing Inventory in a Periodic...Ch. 8 - EXERCISE 8.8 Effects of Errors in Inventory...Ch. 8 - EXERCISE 8.9 Estimating Inventory by the Gross...Ch. 8 - EXERCISE 8.10 Estimating Inventory by the Retail...Ch. 8 - Prob. 11ECh. 8 - Prob. 12ECh. 8 - EXERCISE 8.13 Inventory Turnover A recent annual...Ch. 8 - Prob. 14ECh. 8 - EXERCISE 8.15 Using the Financial Statements of...Ch. 8 - Prob. 1APCh. 8 - PROBLEM 8.2A Alternative Cost Flow Assumptions in...Ch. 8 - PROBLEM 8.3A Alternative Cost Flow Assumptions in...Ch. 8 - Prob. 4APCh. 8 - PROBLEM 8.5A Periodic Inventory Costing...Ch. 8 - PROBLEM 8.6A Effects of Inventory Errors on...Ch. 8 - PROBLEM 8.7A Retail Method Between The Ears...Ch. 8 - PROBLEM 8.8A FIFO versus LIFO Comparisons Walmart...Ch. 8 - Prob. 1BPCh. 8 - PROBLEM 8.2B Alternative Cost Flow Assumptions in...Ch. 8 - PROBLEM 8.3B Alternative Cost Flow Assumptions in...Ch. 8 - Prob. 4BPCh. 8 - PROBLEM 8.5B Periodic Inventory Costing...Ch. 8 - PROBLEM 8.6B Effects of Inventory Errors on...Ch. 8 - PROBLEM 8.7B Retail Method Song Meister is a...Ch. 8 - PROBLEM 8.8B FIFO versus LIFO Comparisons J.C....Ch. 8 - Prob. 1CTCCh. 8 - CASE 8.2 LIFO Liquidation Jackson Specialties has...Ch. 8 - CASE 8.3 Dealing with the Bank Millennium Frozen...Ch. 8 - CASE 8.4 Inventory Turnover A company’s inventory...Ch. 8 - Prob. 2CP
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