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

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 –

FIFO - $13,929

LIFO - $13,566

Weighted Average - $13,845

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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	2019	2018	2017
Net Sales Revenue	\( 220,000	\) 162,000	\( 176,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\)22,000	\(29,000	\)46,000
Net cost of purchase	132,000	90,000	76,000
Cost of goods available for sale	154,000	119,000	122,000
Less: Ending Merchandise Inventory	32,000	22,000	29,000
Cost of goods sold	122,000	97,000	93,000
Gross Profit	98,000	65,000	83,000
Operating Expenses	72,000	38,000	48,000
Net Income	\( 26,000	\) 27,000	$ 35,000

Short Answer

Step by step solution

Step-by-Step Solution

Least tax payable

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