Problem 1: The Effects of Different Cost Flow Assumptions for Inventory
At the end of January...

Question

Problem 1: The Effects of Different Cost Flow Assumptions for Inventory 
  At the end of January 2011, the records of Sheldon and Blair showed the following for a particular item that sold at $20 per unit:

Problem 1, Table 1: Records of Sheldon and Blair

Transactions 
     Units 
     Total Amount

Inventory, January 1, 2011 
     500 @ $6.00 
     $3,000

Purchase, January 12 
     600 @ $7.00 
     $4,200

Purchase, January 26 
     200 @ $7.10 
     $1,420

Sale 
     (400 units sold for $20 each)

Sale 
     (300 units sold for $20 each)

Based on the information provided in the table above, complete the following. An optional template, Assessment 6, Problem 1 Template, is provided in the Suggested Resources under the Capella Resources heading. 
   
   Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory listed below. Show the inventory computations for each method in detail. 
     
     a. Average cost. (Round the average cost per unit to the nearest cent.) 
     b. First in, first out (FIFO). 
     c. Last in, first out (LIFO). 
     d. Specific identification. (Assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase.) 
      
   Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS? 
   Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate. 
   Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain. 
   
  Problem 2: The Effects of Differing Depreciation Methods 
  Total Workout, Inc. purchased three ï¬ï¿½tness machines from Ace Used Equipment at the beginning of the year. All three were used machines that had to be overhauled and installed before they were put into use. The costs of the machines and their renovation and installation are shown in Table 1 below:

Problem 2, Table 1: Equipment Costs

Account 
     Machine A 
     Machine B 
     Machine C

Amount paid for asset 
     $21,000 
     $30,750 
     $8,000

Installation cost 
     $500 
     $1,000 
     $200

Renovation costs prior to use 
     $2,000 
     $1,000 
     $1,500

By the end of the first year, each machine had been operating 4,800 hours. Depreciation estimates are shown in Table 2 below:

Problem 2, Table 2: Equipment Depreciation

Machine 
     Life 
     Residual Value 
     Depreciation Method

A 
     5 years 
     $1,000 
     Straight-line

B 
     60,000 hours 
     $2,000 
     Units-of-production

C 
     4 years 
     $1,500 
     Double-declining balance

Using the data provided above, complete the following: 
   
   Compute the cost of each machine. 
   Give the entry to record depreciation expense at the end of the first year, using all three depreciation methods listed in Table 2.

Aarti J · Accepted Answer

Assessment 6, Problem 1 Template
Solution
	Template for a summarized income statement through gross profit for the month ended January 31, 2011, under four inventory valuation methods: (a) weighted average, (b) FIFO, (c) LIFO, and (d) specific identification. For Sheldon and Blair.
	Learner:
	Sheldon and Blair
	Partial Income Statement
	For the Month Ended January 31, 2011
		(a) Weighted Average		(b) FIFO		(c) LIFO		(d) Specific Identification
	Sales revenue1	$14,000		$14,000		$14,000		$14,000
	Cost of goods sold2	$4,642		$4,400		$4,920		$4,500
	Gross profit	$9,358		$9,600		$9,080		$9,500
	Sheldon and Blair
	Computations
	1Sales revenue:
	700 units @ $20 =	$14,000
	2Cost of goods sold:
		Units		Weighted Average		FIFO		LIFO		Specific Identification
	Beginning inventory	500		$3,000		$3,000		$3,000		$3,000
	Purchases (net)3	800		$5,620		$5,620		$5,620		$5,620
	Goods available for sale	1,300		$8,620		$8,620		$8,620		$8,

Problem 1: The Effects of Different Cost Flow Assumptions for Inventory At the end of January 2011, the records of Sheldon and Blair showed the following for a particular item that sold at $20 per...

Solution

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Related Questions & Answers

Transactions	Units	Total Amount
Inventory, January 1, 2011	500 @ $6.00	$3,000
Purchase, January 12	600 @ $7.00	$4,200
Purchase, January 26	200 @ $7.10	$1,420
Sale	(400 units sold for $20 each)
Sale	(300 units sold for $20 each)

Account	Machine A	Machine B	Machine C
Amount paid for asset	$21,000	$30,750	$8,000
Installation cost	$500	$1,000	$200
Renovation costs prior to use	$2,000	$1,000	$1,500

Machine	Life	Residual Value	Depreciation Method
A	5 years	$1,000	Straight-line
B	60,000 hours	$2,000	Units-of-production
C	4 years	$1,500	Double-declining balance