Zinski Supply Corp. has approached ABC to become a distributor of its time management software. The cost of the software is $550 and ABC would propose to sell the package for $995, including installation. ABC negotiates a discount of 2% after the first 20 software packages are purchased, and an additional 2% discount after the purchase of the next 20 software packages. Emily, Doug, and Bev believe that the time management software is top of the line and that many of their clients would be interested in purchasing this product.
Currently, all inventory at ABC is accounted for using the average cost formula in a perpetual inventory system. Emily 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 October 2017:
July 4 Ten time management software packages are purchased on account and received from Zinski Supply for $5,500 ($550 each), FOB destination, terms n/30.
14 Six packages are sold for $995, each paid in cash.
25 Amount owing to Zinski Supply from the July 4 purchase is paid.
August 1 Ten more packages are purchased on account and received from Zinski Supply for $550 each, FOB destination, terms n/30.
28 Nine packages are sold for a total of $8,955 ($995 each) cash.
29 Amount owing to Zinski Supply from the August 1 purchase is paid.
September 4 Another 10 packages are purchased on account and received from Zinski Supply for $5,390 ($550 × 98% = $539 each), FOB destination, terms n/30.
27 Eight packages are sold on account for a total of $7,960.
29 Amount owing to Zinski Supply from the September 4 purchase is paid.
October 3 Another 20 packages are purchased on account and received from Zinski Supply for $10,672.20 (10 at $539 and 10 at $528.22 ($539 × 98%) each), FOB destination, terms n/30.
27 Seven more software packages are sold for $995, each paid in 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. Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.
(d) Using the information you prepared in (c), prepare journal entries to record each transaction.
(e) Calculate and compare the gross profit margin, assuming the use of the (1) FIFO, and (2) average cost formula.
(f) What guidelines should Emily consider when deciding which inventory cost formula to use?