Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 â Dec. 31 financial year. Exercise for Inventory: TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products. Account Debit Credit Accounts Receivable 17,607,500 Allowance for Doubtful Accounts 20,000 Purchases 85,832,500 Inventory. 2,500,000 TechTone Sales Revenue 134,500,000 TechTone Sales Returns 2,017,500 Cost of TechTone Equipment Sold 0 Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016: Purchases for 2016 (normal operations) Beginning: 5,000 units @ $500 each Purchases: Apr-May 40,000 units @ $500 each Jun-Jul 35,000 units @ $505 each Aug-Sep 48,500 units @ $515 each Oct 24,000 units @ $520 each Nov-Dec 20,000 units @ $535 each Year-End Physical Inventory Count 38,000 units Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice. Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016. Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!
Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layersânot based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index. Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!
Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods. FIFO Method DVLIFO Method Income Statement Cost of TechTone Equipment Sold Balance Sheet Inventory Which method gives higher net income? Which method gives higher assets?
Related questions
Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 â Dec. 31 financial year.
Exercise for Inventory:
TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.
Account Debit Credit
Accounts Receivable 17,607,500
Allowance for Doubtful Accounts 20,000
Purchases 85,832,500
Inventory 2,500,000
TechTone Sales Revenue 134,500,000
TechTone Sales Returns 2,017,500
Cost of TechTone Equipment Sold 0
Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:
| Purchases for 2016 (normal operations) | |||||
| Beginning: | 5,000 | units @ | $500 | each | |
| Purchases: | |||||
| Apr-May | 40,000 | units @ | $500 | each | |
| Jun-Jul | 35,000 | units @ | $505 | each | |
| Aug-Sep | 48,500 | units @ | $515 | each | |
| Oct | 24,000 | units @ | $520 | each | |
| Nov-Dec | 20,000 | units @ | $535 | each | |
| Year-End Physical Inventory Count | 38,000 | units | |||
Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.
Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.
Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!
Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layersânot based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.
| DV LIFO | Ending Inventory at Year-End Cost | Index | Ending Inventory at Base-Yr Cost | Inventory Layers at | Inventory Layers at | Ending Inventory at DV LIFO Cost | LIFO Reserve Adjustment |
| 2015 | |||||||
| 2016 | |||||||
Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!
Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.
| FIFO Method | DVLIFO Method | ||
| Income Statement | Cost of TechTone Equipment Sold | ||
| Balance Sheet | Inventory |
Which method gives higher net income?
Which method gives higher assets?
