Cost flow assumptions-FIFO and LIFO using a periodic system. Beginning inventory was 600 units at a cost of $20 per unit. Goods available for sale during the year 2600 units at a total cost of $57,600. In May 1200 units were purchased at a total cost $26,400. The only other purchase transaction occurred during October. Ending inventory was 1100 units.
a. Calculate the number of units purchased in October and the cost her unit purchased in October.
b. Calculate cost of goods sold and ending inventory under the following cost flow assumptions (using a periodic inventory system):
1. FIFO
2. LIFO
Assume that on September 1, 2013, a 6-month rent payment for $3,000 per month (for a total of $18,000) was made with respect to a commercial lease that the company entered into on that date as a tenant. The company took occupancy of the rented space immediately. The lease term will expire on February 28, 2014. The $18,000 payment was recorded as a debit to Prepaid Rent on September 1, 2013. The adjusting entry on December 31, 2013, is as follows:
a. To calculate the number of units purchased in October, we need to subtract the number of units available for sale before October from the ending inventory.
Number of units available for sale before October = Beginning inventory + Purchases (May) = 600 units + 1200 units = 1800 units
Number of units purchased in October = Ending inventory - Number of units available for sale before October = 1100 units - 1800 units = -700 units
Since the result is a negative value, it means that there were no purchases made in October.
To calculate the cost per unit purchased in October, we need to divide the total cost of purchases in October by the number of units purchased (which in this case is 0, as there were no purchases in October).
Therefore, the cost per unit purchased in October is undefined or not applicable since there were no purchases in October.
b. Now, let's calculate the cost of goods sold and ending inventory under the FIFO and LIFO cost flow assumptions.
1. FIFO (First-In, First-Out):
Under this assumption, we assume that the first units purchased are the first units to be sold.
Cost of goods sold (FIFO) = (Beginning inventory cost) + (Cost of units purchased in May) = (600 units * $20 per unit) + (1200 units * $22 per unit) = $12,000 + $26,400 = $38,400
Ending inventory (FIFO) = Cost of units remaining in inventory * Cost per unit of most recent purchase = (1100 units * $22 per unit) = $24,200
2. LIFO (Last-In, First-Out):
Under this assumption, we assume that the last units purchased are the first units to be sold.
Cost of goods sold (LIFO) = (Cost of units purchased in May) + (Cost of units purchased in October) = (1200 units * $22 per unit) + (0 units) = $26,400 + $0 = $26,400
Ending inventory (LIFO) = Cost of units remaining in inventory * Cost per unit of most recent purchase = (1100 units * $22 per unit) = $24,200
So, the cost of goods sold and ending inventory under the FIFO and LIFO cost flow assumptions are as follows:
FIFO:
- Cost of goods sold = $38,400
- Ending inventory = $24,200
LIFO:
- Cost of goods sold = $26,400
- Ending inventory = $24,200