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Chapter 6: Q28PGA_4 (page 367)

Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of \(4,290. During the month, Fit Gym purchased and sold merchandise on account as follows:

Jan. 5 Purchase 156 crates @ \) 64 each

13 Sale 180 crates @ \( 100 each

18 Purchase 114 crates @ \) 75 each

26 Sale 150 crates @ $ 116 each

Requirements

4. If the business wanted to pay the least amount of income taxes possible, which method would it choose?

Short Answer

Expert verified

The LIFO method would fetch the least tax expenses

Step by step solution

01

Step-by-Step Solution

Step 1: Gross profit under all three methods (FIFO, LIFO, Weighted average)

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

FIFO - $13,929

LIFO - $13,566

Weighted Average - $13,845

02

Least tax payable

As can be 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, there would be less tax expenses 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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Most popular questions from this chapter

Right Now Electronic Center began October with 100 units of merchandise inventory that cost \(70 each. During October, the store made the following purchases:

Oct. 3 35 units @ \) 82 each

12 45 units @ \( 84 each

18 75 units @ \) 90 each

Right Now uses the periodic inventory system, and the physical count at October 31indicates that 130 units of merchandise inventory are on hand.

Requirements

3. Which method will result in the lowest income taxes for Right Now? Why? Whichmethod will result in the highest net income for Right Now? Why?

Question:Assume that Toys Galore store bought and sold a line of dolls during December as follows:

Dec. 1 Beginning merchandise inventory 13 units @ \( 9 each

8 Sale 8 units @ \) 22 each

14 Purchase 16 units @ \( 14 each

21 Sale 14 units @ \) 22 each

Requirements

2. Compute the cost of goods sold, cost of ending merchandise inventory, and grossprofit using the LIFO inventory costing method.

Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of \(4,290. During the month, Fit Gym purchased and sold merchandise on account as follows:

Jan. 5 Purchase 156 crates @ \) 64 each

13 Sale 180 crates @ \( 100 each

18 Purchase 114 crates @ \) 75 each

26 Sale 150 crates @ $ 116 each

Requirements

1. Prepare a perpetual inventory record, using the FIFO inventory costing method, and determine the company鈥檚 cost of goods sold, ending merchandise inventory, and gross profit.

Clarmont 91影视, which uses the FIFO inventory costing method, has the following account balances at May 31, 2019, prior to releasing the financial statements for the year:

Merchandise Inventory, ending \( 13,500

Cost of Goods Sold 68,000

Net Sales Revenue 123,000

Clarmont has determined that the current replacement cost (current market value) of the May 31, 2019, ending merchandise inventory is \)12,400.

Requirements

2. What value would Clarmont report on the balance sheet at May 31, 2019, for merchandise inventory?

Question:The periodic inventory records of Flexon Prosthetics indicate the following for the month of July:

Jul. 1 Beginning merchandise inventory 6 units @ \( 60 each

8 Purchase 5 units @ \) 67 each

15 Purchase 10 units @ \( 70 each

26 Purchase 5 units @ \) 85 each

At July 31, Flexon counts four units of merchandise inventory on hand.

Compute ending merchandise inventory and cost of goods sold for Flexon using theweighted-average inventory costing method.
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