Question

Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 – 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 layers—not 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 Base-Yr Cost	Inventory Layers at Acq.-Yr Cost	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?