On December 1, Discount Electronics has three DVD players left in stock. All are
ID: 2664864 • Letter: O
Question
On December 1, Discount Electronics has three DVD players left in stock. All are identical, all are priced to sell at $85. One of the three DVD players left in stock, with serial #1012, was purchased on June 1 at a cost of $52. Another, with serial #1045, was purchased on November 1 for $48. The last player, serial #1056, was purchased on November 30 for $43.Instructions:
(a) Calculate the cost of goods sold using the FIFO periodic inventory method assuming that two of the three players were sold by the end of December, Discount Electronic's year-end.
(b) If Discount Electronics used the specific identification method instead of the FIFO method, how might it alter its earnings by "selectively choosing" which particular players to sell to the two customers? What would Discount's cost of goods sold be if the company wished to minimize earnings? Maximize earnings?
(c) Which inventory method, FIFO or specific identification, do you recommend that Discount use? Explain why.
Explanation / Answer
The purchase has been made as under:
Date Serial Number Cost price
June. 01 #1012 $52
Nov. 01 #1045 $48
Nov. 30 #1056 $43
FIFO METHOD:
Cost of Goods sold
#1052 $52
#1045 $48
Total 2 DVDs $100
(b)
If specific identification method is used
Cost of Goods sold
#1045 $48
#1056 $43
Total 2 DVDs $91
By changing the method cost of goods sold has come down from$100 to $91.
This change will increase earnings.
(c) In the business of Discount Electronics, it is possible to identify the purchase and sale of individual item. Hence the company should use specific identification method of costing. With the serial number available on each item, it is easy to identify and calculate the cost of goods sold and ending inventory.
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