Comparison of Inventory Methods Dutch Truck Sales sells semi

Comparison of Inventory Methods Dutch Truck Sales sells semitrailers. The exce current inventory includes the following five semitrailers (identical pt for paint color) along with purchase dates and costs: Semitrailer Purchase Date Cost April 3, 2015 April 10, 2015 April 10, 2015 May 4, 2015 May 12, 2015 $73,000 70,000 71,000 77,000 78,500 4 On May 20, 2015, a trucking firm purchased semitrailer 3 from Dutch for $86,000 Compute the gross margin on this sale assuming Dutch uses the: (a) FIFO inventory method (b) LIFO inventory method (c) Specific identification method Which inventory method do you think Dutch should use? Why? 1. 2.

Solution

(a) FIFO method

Using FIFO, cost of the semitrailer - 1 should be taken for cost of sales......... $73000

Gross margin = Sales - Cost of sales = 86000 - 73000 = 13000

(b) LIFO method

If LIFO is used, last purchase = May 12 is taken as cost of sale = 78500

Gross margin = 86000 - 78500 = 7500

(c) Specific identification method

Here we take that particular semitrailer which was actually sold = April 10 ----- 71000

Gross margin = 86000 - 71000 = 15,000

Question - 2

FIFO and LIFO are expected to be used only when specific identification is not possible. But in the given case, it seems that specific identification is clearly possible, hence we can say specific identification is a better method in the given case.