Q-2

(a) (i) How does accounting for ordinary maintenance costs differ from accounting for the costs of assts improvements and why do some people argue that depreciation should be based on the replacement cost of an asset?

(ii) Under what circumstances might a firm sell or trade an asset that is not fully depreciated and is in good working order?

b) Store has experienced sharply increasing purchase costs for an animal feed nutrient during the last six months of the year. Inventory and sales data for the nutrient follow.

		Dollar	Unit Cost	Unit sales price
July	Beginning Inv	4000	$0.63
	Purchase	3000	0.67
	Sales	6000		0.80
Aug.	Purchase	10000	0.67
	Sales	6000		0.85
Sept.	Purchase	5000	0.70
	Sales	6000		0.85
Oct.	Purchase	5000	0.75
	Sales	4000		0.95
Nov.	Purchase	8000	0.76
	Sales	10000		0.95
Dec.	Purchase	7000	0.8
	Sales	5000		1.00

Store uses a periodic inventory system

Required:

1. Identify the inventory method that will result in the most reported net income for the sixth-month period.
2. Identify the inventory method that will show the least net income.
3. How much more or less gross profit will result from using the first-in, first-out method than from using the last-in, first-out method?
4. The use of FIFO will result in the same inventory figure under either a periodic or perpetual system, whereas LIFO inventory will differ with the two systems. Explain why these differences will occur.