Perpetual inventory system

Page 1.

Travel Warehouse distributes suitcases to retail stores and extends credit terms of 1/10, n/30 to all of its customers. At the end of July, Travel's inventory consisted of 40 suitcases purchased at $30 each. During the month of July the following merchandising transactions occurred.

July 1 Purchased 50 suitcases on account for $30 each from Suitcase Manufacturers, FOB destination, terms 1/15, n/30. The appropriate party also made a cash payment of $100 for freight on this date.

3. Sold 40 suitcases on account to Luggage World for $50 each.
9. Paid Suitcase Manufacturers in full.
12. Received payment in full from Luggage World.
17. Sold 30 suitcases on account to The Travel Spot for $50 each.
18. Purchased 60 suitcases on account for $1,700 from Vacation Manufacturers, FOB shipping
point, terms 2/10, n/30. The appropriate party also made a cash payment of $100 for
freight on this date.
20. Received $300 credit (including freight) for 10 suitcases returned to Vacation
Manufacturers.
21. Received payment in full from The Travel Spot.
22. Sold 40 suitcases on account to Vacations-Are-Us for $50 each.
30 Paid Vacation Manufacturers in full.
31 Granted Vacations-Are-Us $250 credit for 5 suitcases returned costing $150.

Travel Warehouse's chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, NO. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold.

** Journalize the transactions for the month of July for Travel Warehouse using a perpetual inventory system.

Page 2.

The management of Congo Co. asks your help in determining the comparative effects of FIFO and LIFO inventory cost flow methods. For 2002, the accounting records show the following data.

Inventory, January 1 (10,000 units) $ 35,000
Cost of 110,000 units purchased 478,000
Selling price of 95,000 units sold 665,000
Operating expenses 120,000

Units purchased consisted of 40,000 units at $4.20 on May 10; 50,000 units at $4.40 on August 15; And 20,000 units at $4.50 on November 20. Income taxes are 28%.

Instructions:

a. Prepare comparative condensed income statements for 2002 under FIFO and LIFO, (Show computations of ending inventory.)

b. Answer the following questions for management.
1. Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why?

2. Which inventory cost flow method produces the most meaningful net income? Why?

3. Which inventory cost flow method is most likely to approximate actual physical flow of the goods? Why?

4. How much additional cash will be available for management under LIFO than under FIFO? Why?

5. How much of the gross profit under FIFO is illusory in comparison with the gross profit under LIFO.