On February 28, Discount Electronics Ltd. has three home entertainment systems left in stock. The purchase dates, serial numbers, and cost of each of the three systems are as follows:

Date _________Serial Number __________Cost

Jan. 2 .................. #1012 .................... $800

Feb. 1 .................. #1045 ..................... 740

28 ...................... #1056 ..................... 680

All three systems are priced to sell at $1,300. By March 31, two systems had been sold and one system remained in inventory.

Instructions

(a) Explain how Discount Electronics would use specific identification to determine the cost of goods sold and the cost of the ending inventory.

(b) Explain how Discount Electronics could manipulate its profit using specific identification by "selectively choosing" which home entertainment system to sell to the two customers in the month of March. What would Discount Electronics' cost of goods sold and gross profit be if the company wished to minimize profit? To maximize profit? Ignore income tax.

(c) What guidelines should Discount Electronics consider when deciding whether to use specific identification or one of the other cost methods to determine the cost of its inventory?