The manager of Kzinski Supply Corp. has approached Koebel's Family Bakery to become the exclusive Canadian distributor of deluxe European mixers. Koebel's will pay Kzinski for its purchases of mixers in Canadian dollars. However, Kzinski uses euros as its primary currency, which means that the purchase price converted to Canadian dollars will change each time a mixer is purchased. The current cost of a mixer is $550 and Koebel's would propose to sell each mixer for $1,050. Natalie, Janet, and Brian believe that the mixers are top of the line and that, because these mixers are not available in Canada, many of their customers would be interested in purchasing this product.

Natalie believes that at the beginning of each month there should be at least three mixers in inventory. It takes approximately three weeks for the mixers to come from Europe and it is best to have an adequate supply of mixers on hand ready to be sold.

Currently, all inventory at Koebel's is accounted for using the average cost formula in a perpetual inventory system. Natalie remembers that there is another cost formula, FIFO, that can be used to determine the cost of inventory. Because this is a new type of inventory, she wonders if FIFO would make the accounting a little easier and better reflect ending inventory and cost of goods sold.

The following transactions occur between the months of July and September 2011:

July 5 Three deluxe mixers are purchased on account and received from Kzinski Supply for $1,650 ($550 each), FOB destination, terms n/30.

14 One deluxe mixer is sold for $1,050 cash.

25 Amounts owing to Kzinski Supply from the July 5 purchase are paid.

August 2 One deluxe mixer is purchased on account and received from Kzinski Supply for $568, FOB destination, terms n/30.

29 Two deluxe mixers are sold for a total of $2,100 cash.

30 Amounts owing to Kzinski Supply from the August 2 purchase are paid.

September 6 Three deluxe mixers are purchased on account and received from Kzinski Supply for $1,692 ($564 each), FOB destination, terms n/30.

13 Three mixers are sold on account for a total of $3,150.

28 Amounts owing to Kzinski Supply from the September 6 purchase are paid.

October 4 Three deluxe mixers are purchased on account and received from Kzinski Supply for $1,722 ($574 each), FOB destination, terms n/30.

25 One deluxe mixer is sold for $1,050 cash.

Instructions

(a) Prepare a perpetual inventory schedule, assuming use of the FIFO cost formula.

(b) Using the information you prepared in (a), prepare journal entries to record each transaction.

(c) Prepare a perpetual inventory schedule, assuming use of the average cost formula.

(d) Using the information you prepared in (c), prepare journal entries to record each transaction. (e) Calculate and comp are the gross profit margin, assuming the use of the (1) FIFO, and( 2) average cost formula.

(f) What guidelines should Natalie consider when deciding which inventory cost formula to use