/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q5CA. Question: In January 2017, Susqu... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 8: Q5CA. (page 437)

Question: In January 2017, Susquehanna Inc. requested and secured permission from the commissioner of the Internal Revenue Service to compute inventories under the last-in, first-out (LIFO) method and elected to determine inventory cost under the dollar-value LIFO method. Susquehanna Inc. satisfied the commissioner that cost could be accurately determined by use of an index number computed from a representative sample selected from the company鈥檚 single inventory pool.

Instructions

(a) Why should inventories be included in (1) a balance sheet and (2) the computation of net income?

(b) The Internal Revenue Code allows some accountable events to be considered differently for income tax reporting purposes and financial accounting purposes, while other accountable events must be reported the same for both purposes. Discuss why it might be desirable to report some accountable events differently for financial accounting purposes than for income tax reporting purposes.

(c) Discuss the ways and conditions under which the FIFO and LIFO inventory costing methods produce different inventory valuations. Do not discuss procedures for computing inventory cost.

Short Answer

Expert verified

Inventory is shown in two places in books of accounts due to computing net income and total assets. Different inventory method gives different revenue and tax expense and thus gives different inventory valuation.

Step by step solution

01

Inventory in the balance sheet and net income

The inventory for any business is divided into two portions鈥攕old inventories and inventory on hand. The cost of sold inventories is calculated to determine gross profit. So, the cost of goods sold is recorded in the income statement,

The residual inventories or the inventories on hand are not the cost for the business but are a kind of asset that a company holds for a short period of time. Thus those residual or closing inventories should be presented in the balance sheet.

So, in this way inventories are included in both the income statement and balance sheet.

02

Different accountable events for tax reporting

Accounting is based on different assumptions and estimations. Some estimations drive more net income while some less. Although all the assumptions and estimations are correct in their own way.

So under different estimations and assumptions, the same accounting event puts a different effect on the income statement and financial position.

From a business point of view, an owner will adopt an assumption that reflects higher income and good financial position but from the government and tax point of view, the assumption that fetches less income and lower financial position would be adopted.

Thus Internal Revenue Code allows the adoption of that assumption and estimations that is advantageous from both points of view.

03

Condition for the difference in inventory valuation under LIFO & FIFO

The following are the conditions for the difference under the two methods 鈥�

i) Rising pricing trend

ii) LIFO Liquidation

iii) Deferrals of income tax in LIFO

iv) Kinds and nature of inventory

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The following independent situations relate to inventory accounting.

1. Kim Co. purchased goods with a list price of \(175,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. How much should Kim Co. record as the cost of these goods?

2. Keillor Company鈥檚 inventory of \)1,100,000 at December 31, 2017, was based on a physical count of goods priced at cost and before any year-end adjustments relating to the following items.

(a) Goods shipped from a vendor f.o.b. shipping point on December 24, 2017, at an invoice cost of \(69,000 to Keillor Company were received on January 4, 2018.

(b) The physical count included \)29,000 of goods billed to Sakic Corp. f.o.b. shipping point on December 31, 2017. The carrier picked up these goods on January 3, 2018.

What amount should Keillor report as inventory on its balance sheet?

3. Zimmerman Corp. had 1,500 units of part M.O. on hand May 1, 2017, costing \(21 each. Purchases of part M.O. during May were as follows.

Units Unit Cost

May 9 2,000 \)22.00

17 3,500 23.00

26 1,000 24.00

A physical count on May 31, 2017, shows 2,000 units of part M.O. on hand. Using the FIFO method, what is the cost of part M.O. inventory at May 31, 2017? Using the LIFO method, what is the inventory cost? Using the average-cost method, what is the inventory cost?

4. Ashbrook Company adopted the dollar-value LIFO method on January 1, 2017 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO.

At Base- At Current-

Inventory Year Cost Year Cost

1/1/17 \(200,000 \)200,000

12/31/17 240,000 264,000

12/31/18 256,000 286,720

Computing an internal price index and using the dollar-value LIFO method, at what amount should the inventory be reported at December 31, 2018?

5. Donovan Inc., a retail store chain, had the following information in its general ledger for the year 2018.

Merchandise purchased for resale $909,400

Interest on notes payable to vendors 8,700

Purchase returns 16,500

Freight-in 22,000

Freight-out (delivery expense) 17,100

Cash discounts on purchases 6,800

What is Donovan鈥檚 inventoriable cost for 2018?

Instructions

Answer each of the preceding questions about inventories, and explain your answers.

Jane Yoakam, president of Estefan Co., recently read an article that claimed that at least 100 of the country鈥檚 largest 500 companies were either adopting or considering adopting the last-in, first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to

(1) neutralize the effect of inflation in their financial statements,

(2) eliminate inventory profits, and (3) reduce income taxes. Ms. Yoakam wonders if the switch would benefit her company.

Estefan currently uses the first-in, first-out (FIFO) method of inventory valuation in its periodic inventory system. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets.

Ms. Yoakam has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

Instructions

(a) Explain to Ms. Yoakam what 鈥渋nventory profits鈥� are and how the LIFO method of inventory valuation could reduce them.

(b) Explain to Ms. Yoakam the conditions that must exist for Estefan Co. to receive tax benefits from a switch to the LIFO method.

Ann M. Martin Company makes the following errors during the current year.

(Evaluate each case independently and assume ending inventory in the following year is correctly stated.)

1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.

2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recordedand paid for in the following year.)

3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paidfor in the following year.)

Instructions

Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.

At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company鈥檚 financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?

Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Units Unit Total Units Selling Total

InCostSoldPrice

Date Transaction

July 1 Balance 100 \(4.10 \) 410

6 Purchase 800 4.20 3,360

7 Sale 300\(7.00 \) 2,100

10 Sale 300 7.30 2,190

12 Purchase 400 4.50 1,800

15 Sale 200 7.40 1,480

18 Purchase 300 4.60 1,380

22 Sale 400 7.40 2,960

25 Purchase 500 4.58 2,290

30 Sale 200 7.50 1,500

Totals 2,100\(9,240 1,400\)10,230

Instructions

(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

(1) FIFO.

(2) LIFO.

(3) Weighted-average.

(b) Answer the following questions.

(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.

(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.
See all solutions

Recommended explanations on Business Studies Textbooks

Human 91影视

Read Explanation

Insurance

Read Explanation

Managers

Read Explanation

Startups

Read Explanation

Organizational Communication

Read Explanation

Accounting

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.