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Chapter 8: Question 15E (page 426)

The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.

Sales 21,000 units @ \(50

Inventory, January 1 6,000 units @ 20

Purchases 6,000 units @ 22

10,000 units @ 25

7,000 units @ 30

Inventory, December 31 8,000 units @ ?

Operating expenses \)200,000

Instructions

Prepare a condensed income statement for the year on both bases for comparative purposes.

Short Answer

Expert verified

The net income under the FIFO method is higher by $71,000.

Step by step solution

01

Ending inventory and Income statement under FIFO

Value of ending inventory

Units

Cost per unit

Amount

7000

$30

$210,000

1000

$25

$25,000

Total

8,000

$235,000

Endinginventoryperunitcost=EndinginventoryvalueEndinginventoryunits=235,0008,000=29.375

Condensed Income Statement

Particular

Amount

Sales

$1,050,000

Cost of goods sold:

Opening Stock

$120,000

Add: Purchases

$592,000

Less: Closing stock

$235,000

$477,000

Gross Profit

$573,000

Less: Operating Expenses

$200,000

Net Income

$373,000

02

Ending inventory and Income Statement under LIFO

Value of ending inventory

Units

Cost per unit

Amount

6000

$20

$120,000

2000

$22

$44,000

Total

8,000

$164,000

Endinginventoryperunitcost=EndinginventoryvalueEndinginventoryunits=164,0008,000=20.5

Condensed Income Statement

Particular

Amount

Sales

$1,050,000

Cost of goods sold:

Opening Stock

$120,000

Add: Purchases

$592,000

Less: Closing stock

$164,000

$548,000

Gross Profit

$502,000

Less: Operating Expenses

$200,000

Net Income

$302,000

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Most popular questions from this chapter

Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.

August 10 Purchased merchandise on account, \(12,000, terms 2/10, n/30.

13 Returned part of the purchase of August 10, \)1,200, and received

credit on account.

15 Purchased merchandise on account, \(16,000, terms 1/10, n/60.

25 Purchased merchandise on account, \)20,000, terms 2/10, n/30.

28 Paid invo

ice of August 15 in full.

Instructions

(a) Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken:

(1) Prepare general journal entries to record the transactions.

(2) Describe how the various items would be shown in the financial statements.

(b) Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses:

(1) Prepare general journal entries to enter the transactions.

(2) Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time.

(3) Describe how the various items would be shown in the financial statements.

(c) Which of the two methods do you prefer and why?

Question:Johnny Football Shop began operations on January 2, 2017. The following stock record card for footballs was taken from the records at the end of the year.

Units Unit Invoice Gross Invoice

Date Voucher Terms Received Cost Amount

1/15 10624 Net 30 50 \(20 \)1,000

3/15 11437 1/5, net 30 65 16 1,040

6/20 21332 1/10, net 30 90 15 1,350

9/12 27644 1/10, net 30 84 12 1,008

11/24 31269 1/10, net 30 76 11 836

Totals 365 $5,234

A physical inventory on December 31, 2017, reveals that 100 footballs were in stock. The bookkeeper informs you that all thediscounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.

Instructions

(a) Compute the December 31, 2017, inventory using the FIFO method.

(b) Compute the 2017 cost of goods sold using the LIFO method.

(c) What method would you recommend to the owner to minimize income taxes in 2017, using the inventory informationfor footballs as a guide?

Cruise Industries purchased \(10,800 of merchandise on February 1, 2017,

subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned \)2,500 (gross price before trade or cash discount)on February 4. The invoice was paid on February 13.

Instructions

(a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(b) Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(c) At what amount would the purchase on February 1 be recorded if the net method were used?

The dollar-value LIFO method was adopted by Enya Corp. on January 1, 2017. Its inventory on that date was \(160,000. On December 31, 2017, the inventory at prices existing on that date amounted to \)140,000. Theprice level at January 1, 2017, was 100, and the price level at December 31, 2017, was 112.

Instructions

(a) Compute the amount of the inventory at December 31, 2017, under the dollar-value LIFO method.

(b) On December 31, 2018, the inventory at prices existing on that date was $172,500, and the price level was 115. Computethe inventory on that date under the dollar-value LIFO method.

Ehlo Company is a multiproduct firm. Presented below is information concerning one of its products, the Hawkeye.

Date Transaction Quantity Price/Cost

1/1 Beginning inventory 1,000 $12

2/4 Purchase 2,000 18

2/20 Sale 2,500 30

4/2 Purchase 3,000 23

11/4 Sale 2,200 33

Instructions

Compute cost of goods sold, assuming Ehlo uses:

(a) Periodic system, FIFO cost flow. (d) Perpetual system, LIFO cost flow.

(b) Perpetual system, FIFO cost flow. (e) Periodic system, weighted-average

cost flow.

(c) Periodic system, LIFO cost flow. (f) Perpetual system, moving-average

cost flow.
See all solutions

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