On February 28, Discount Electronics Ltd. has three ultra HD television systems left in stock. The purchase date, serial number, and cost of each of the three systems are as follows:
Date________Serial Number__________Cost
Jan. 2....................#1012...........................$2,400
Feb. 1...................#1045.............................1,900
28.........................#1056.............................1,680
All three systems are priced to sell at $2,600. 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 net income using specific identification by "selectively choosing" which home entertainment systems 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 net income? To maximize net income? Ignore income tax.
(c) What guidelines should Discount Electronics consider when deciding whether to use specific identification or one of the other cost formulas to determine the cost of its inventory?