Assignment: Inventory and Depreciation
Consider this Balance Sheet situation:
Three years ago Mr. Jones bought a new machine that inserts pimentos into green olives.
He paid $10,000 for the machine, and it went happily to work and has been filling 5,000 green olives per day with bright red pimentos.
At the time of purchase, Mr. Jones' accountant told him that the standard useful life for this type of equipment was 10 years. Mr. Jones decided to use the straight-line method to calculate depreciation.
Answer the following questions:
1. What amount would go on the Balance Sheet at the time of purchase?
2. Where would this amount have been posted on the Balance Sheet?
3. What is the current book value of the equipment?
4. How much accumulated depreciation is posted?
Consider this Income Statement situation:
Mr. Jones started the year with no olives in inventory. He bought 5,000 green olives at 25 cents each in March, 10,000 at 50 cents each in July, and 10,000 at 75 cents each in November. At year end he had 2,000 olives left in inventory.
Calculate his ending inventory value using:
Average cost method
FIFO
LIFO
Which method should he use when he prepares his Income Statement to show the bank?