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  • CH 5 - in Class Exercise - SOLUTION-1

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    This document provides an example of calculating inventory using different costing methods (FIFO, LIFO, weighted average) and applying the lower of cost or market rule. It shows inventory purchases and sales for a company, and calculates ending inventory and cost of goods sold for each period under each method. It also demonstrates how to apply the lower of cost or market rule to adjust inventory downward if the market value falls below cost for individual inventory items or in the aggregate.

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    Ch 5- In Class Exercise- SOLUTION-1

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    This document provides an example of calculating inventory using different costing methods (FIFO, LIFO, weighted average) and applying the lower of cost or market rule. It shows inventory purchases and sales for a company, and calculates ending inventory and cost of goods sold for each period under each method. It also demonstrates how to apply the lower of cost or market rule to adjust inventory downward if the market value falls below cost for individual inventory items or in the aggregate.

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    © All Rights Reserved
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    13 views4 pages

    CH 5 - in Class Exercise - SOLUTION-1

    Uploaded by

    cherry blossom
    This document provides an example of calculating inventory using different costing methods (FIFO, LIFO, weighted average) and applying the lower of cost or market rule. It shows inventory purchases and sales for a company, and calculates ending inventory and cost of goods sold for each period under each method. It also demonstrates how to apply the lower of cost or market rule to adjust inventory downward if the market value falls below cost for individual inventory items or in the aggregate.

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    © All Rights Reserved
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    of 4

    ACG 2021 - CHAPTER 5 – IN-CLASS EXERCISE - SOLUTION

    PERPETUAL INVENTORY SYSTEM


    EXAMPLE:
    The inventory records of Synergy Prosthetics indicate the following purchases at July 31. First
    calculate the total amount of each purchase.

    DATE UNITS PER TOTAL


    UNIT
    July 1 Beg Inventory 6 units $60 $360

    July 8 Purchase 5 units $67 335

    July 15 Purchase 10 units $70 700

    July 26 Purchase 5 units $85 425

    AVAILABLE
    26 units $1,820
    FOR SALE

    On July 29th, Synergy sold 18 units at a price of $125 each. Compute Cost of Goods Sold and
    Ending Inventory using each of the following methods: FIFO, LIFO & Weighted Average Cost.

    First-in-First-Out (FIFO)

    A B C AxC BxC
    SOLD END INV PER COGS END INV
    UNIT

    From July 1 6 units $60 $360

    From July 8 5 units $67 335

    From July 15 7 units 3 units $70 490 210

    July 26 5 units $85 425

    TOTAL 18 units 8 units $ 1,185 $ 635

    1
    Last-in-First-Out (LIFO)

    A B C AxC BxC
    SOLD END INV PER COGS END INV
    UNIT

    From July 26 5 units $85 $425

    From July 15 10 units $70 700

    From July 8 3 units 2 units $67 201 134

    July 1 6 units $60 360

    TOTAL 18 units 8 units $1,326 $ 494

    Weighted Average Cost

    AVERAGE COST COGS END INV

    Inventory Available for Sale $1,820

    Divide by: Units Available for Sale 26

    Average Cost $70 x 18 units X 8 units

    TOTAL $1,260 $ 560

    2
    EXAMPLE: Purchases and Sales

    The inventory records of Synergy Prosthetics indicate the following purchases and sales at July 31.

    DATE UNITS PER COST SALES


    UNIT
    July 1 Beg Inventory 6 units $60 $360

    July 8 Purchase 5 units $67 335

    July 10 Sales (7) units $125 875

    July 15 Purchase 10 units $70 700

    July 22 Sales (8) units $125 1,000

    Compute Cost of Goods Sold and Ending Inventory using FIFO:

    DATE UNITS PER UNIT COST COGS INV BALANCE

    July 1 Beg Inv. 6 units $60 $360 $360

    July 8 Purchase 5 units $67 335 695

    July 10 From July 1 (6) units 60 360 335

    From July 8 (1) unit 67 67 268

    July 15 Purchase 10 units $70 700 968

    July 22 From July 8 (4) units 67 268 700

    From July
    (4) units 70 280 420
    15

    TOTAL 6 units $ 975 $ 420

    3
    LOWER OF COST OR MARKET
    Inventory is originally recorded at original cost. However, it should be periodically evaluated to see if
    adjustments need to be made to comply with the Lower of Cost or Market (LCM) rule.

    Market value = Replacement Cost

    A B C AxB AxC
    ITEM QTY COST MV PER TOTAL TOTAL LCM
    PER UNIT COST MKT
    UNIT

    X 20 $40 $42 $ 800 $ 840 $ 800

    Y 15 38 35 570 525 525

    Z 30 28 24 840 720 720

    TOTAL $ 2,210 $ 2,085 $ 2,045

    If the LCM rule is applied to each individual item, show the entry necessary to adjust inventory.

    Inventory COGS
    Bal. 2,210
    165 165

    2,045

    If the LCM is applied to total inventory in aggregate, what would be the ending inventory after
    adjustment? ___$2,085________

    NOTE: Once an adjustment has been made to reduce the inventory total, you cannot make an entry
    to increase the inventory balance later, even if the market value increases. Also, an entry can never
    be made to record inventory above its original cost.

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