Problem 8.1A

Four Methods of Inventory Valuation

On January 27, 2002, Nilesome, Inc. sold 800 widgets to Warren Supplies. Immediately prior to this sale, Nilesomes perpetual inventory records for widgets included the following cost layers:

Purchase Date Quantity Unit Cost Total Cost

Dec. 9, 2001......................................................... 500 $30 $15,000

Jan. 19, 2002........................................................ 1,000 33 33,000

Total on hand....................................................... 1,500 $48,000

Instructions

Note: We present this problem in the normal sequence of the accounting cycle that is, journal entries before ledger entries. However, you may find it helpful to work part b first.

a. Prepare a separate journal entry to record the cost of goods sold relating to the January 27 sale of 800 widgets, assuming that Nilesome uses:

1. Specific identification (400) of the units sold were purchased on December 9, and the remaining 400 were purchased on January 19).

2. Average cost.

3. FIFO.

4. LIFO.

b. Complete a subsidiary ledger record for widgets using each of the four inventory valuation methods listed above. Your inventory records should show both purchases of this product, the sale on January 19, and the balance on hand at December 9, January 19, and January 27. Use the formats for inventory subsidiary records illustrated in Chapter 8 of the text.

c. Refer to the cost of goods sold figures computed in part a. For financial reporting purposes, can the company use the valuation method that resulted in the lowest cost of goods sold if, for tax purposes, it used the method that resulted in the highest cost of goods sold? Explain.