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Chapter 6: Q32PGA_3 (page 369)

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?

Short Answer

Expert verified

LIFO would result in the lowest tax expense. FIFO would result in the highest net income.

Step by step solution

01

Step-by-Step SolutionStep 1: Method yielding the lowest income tax

Under LIFO the net income would be lowest as the COGS is valued at the current prices. In the given case the gross income under LIFO is lowest at $21,040.

So the income tax would also be the lowest under LIFO.

02

Method yielding the highest net income

Under FIFO the COGS is valued at the historical cost. So the value of COGS under this method would be the lowest yielding the highest income.

In the given case the gross margin under FIFO is highest at $21,770.

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Most popular questions from this chapter

What is the effect on the cost of goods sold, gross profit, and net income if ending merchandise inventory is understated?

Which principle states that businesses should use the same accounting methods and procedures from period to period?

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

3. Prepare a perpetual inventory record for the merchandise inventory using the weighted-average inventory costing method.

Some of M and C Electronics’s merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is \(24,000 below the business’s cost of the goods, which was \)97,000. Before any adjustments at the end of the period, the company’s Cost of Goods Sold account has a balance of $380,000.

Requirements

2. At what amount should the company report merchandise inventory on the balance sheet?

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

5. Which method results in a higher gross profit?
See all solutions

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