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...

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:

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.

1. 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.)
   
   
   
   


2. Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS?


3. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate.


4. 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:

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

Using the data provided above, complete the following:

1. Compute the cost of each machine.


2. Give the entry to record depreciation expense at the end of the first year, using all three depreciation methods listed in Table 2.