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Chapter 6: Q33PGB_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

The LIFO method would yield a lesser tax expense.

Step by step solution

01

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

02

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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Most popular questions from this chapter

Question:Ward Hardware does not expect costs to change dramatically and wants to use an inventory costing method that averages cost changes.

Requirements

1. Which inventory costing method would best meet Ward鈥檚 goal?

2. Assume Ward wanted to expense out the newer purchases of goods instead.

Which inventory costing method would best meet that need?

Futuristic Electronic Center began October with 65 units of merchandise inventory that cost \(82 each. During October, the store made the following purchases:

Oct. 3 25 units @ \) 90 each

12 30 units @ \( 90 each

18 35 units @ \) 96 each

Futuristic uses the periodic inventory system, and the physical count at October 31 indicates that 80 units of merchandise inventory are on hand.

Requirements

2. Net sales revenue for October totaled $28,000. Compute Futuristic鈥檚 gross profit for October using each method.

Futuristic Electronic Center began October with 65 units of merchandise inventory that cost \(82 each. During October, the store made the following purchases:

Oct. 3 25 units @ \) 90 each

12 30 units @ \( 90 each

18 35 units @ \) 96 each

Futuristic uses the periodic inventory system, and the physical count at October 31 indicates that 80 units of merchandise inventory are on hand.

Requirements

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

Steel Mill began August with 50 units of iron inventory that cost \(35 each. During August, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Aug. 3 Sale 45 \) 85

8 Purchase 90 $ 54

21 Sale 85 88

30 Purchase 15 58

Requirements

6. If the business wanted to maximize gross profit, which method would it select?

Steel Mill began August with 50 units of iron inventory that cost \(35 each. During August, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Aug. 3 Sale 45 \) 85

8 Purchase 90 $ 54

21 Sale 85 88

30 Purchase 15 58

Requirements

2. Prepare a perpetual inventory record for the merchandise inventory using the LIFO inventory costing method.
See all solutions

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