33PGB_4 Exercise World began January wit... [FREE SOLUTION]

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Chapter 6: 33PGB_4 (page 369)

Exercise World began January with merchandise inventory of 90 crates of vitamins that cost a total of $5,850. During the month, Exercise World purchased and soldmerchandise on account as follows:
Jan. 2 Purchase 130 crates @ $ 76 each
5 Sale 140 crates @ $ 100 each
16 Purchase 170 crates @ $ 86 each
27 Sale 180 crates @ $ 104 each
Requirements
4. If the business wanted to pay the least amount of income taxes possible, whichmethod would it choose?

Short Answer

Expert verified

Answer

The LIFO method would yield a lesser tax expense.

Step by step solution

Gross profit under all three methods (FIFO, LIFO, Weighted average)

Gross profit computed in the previous parts under FIFO, LIFO, and Weighted Average cost amounts to as follows 鈥�

FIFO: $8,390

LIFO: $6,920

Weighted Average - $7,880

Least tax payable

As seen in the above step, the LIFO method fetches the least gross income. Thus, assuming the operating expenses are the same under all three methods, fewer tax expenses would be under the LIFO method.

This is also reasonable as LIFO computes the COGS at the recent prices, so the cost of goods sold would be higher than computed in any other method. The higher COGS would lead to generating lower taxable income.

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NATURE FOODS GROCERY
Income Statements
Years Ended June 30, 2019 and 2018
	2019	2018
Net Sales Revenue	\( 134,000	\) 119,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\(17,000	\)14,000
Net Cost of Purchases	78,000	67,000
Cost of Goods Available for Sale	95,000	81,000
Less: Ending Merchandise Inventory	18,000	17,000
Cost of Goods Sold	77,000	64,000
Gross Profit	57,000	55,000
Operating Expenses	26,000	21,000
Net Income	\( 31,000	\) 34,000

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Short Answer

Step by step solution

Gross profit under all three methods (FIFO, LIFO, Weighted average)

Least tax payable

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