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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 –

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

Nutriset Foods reports merchandise inventory at the lower-of-cost-or-market. Prior to releasing its financial statements for the year ended March 31, 2019, Nutriset’s preliminary income statement, before the year-end adjustments, appears as follows:

NUTRISET FOODS

Income Statement (Partial)

Year Ended March 31, 2019

Net Sales Revenue \( 118,000

Cost of Goods Sold 47,000

Gross Profit \) 71,000

Nutriset has determined that the current replacement cost of ending merchandise inventory is \(19,500. Cost is \)24,000.

Requirements

2. Prepare a revised partial income statement to show how Nutriset Foods should report sales, cost of goods sold, and gross profit.

Clarmont Resources, which uses the FIFO inventory costing method, has the following account balances at May 31, 2019, prior to releasing the financial statements for the year:

Merchandise Inventory, ending \( 13,500

Cost of Goods Sold 68,000

Net Sales Revenue 123,000

Clarmont has determined that the current replacement cost (current market value) of the May 31, 2019, ending merchandise inventory is \)12,400.

Requirements

2. What value would Clarmont report on the balance sheet at May 31, 2019, for merchandise inventory?

How is inventory turnover calculated, and what does it measure?

Question:Golf Unlimited carries an inventory of putters and other golf clubs. The sales price of each putter is \(119. Company records indicate the following for a particular line ofGolf Unlimited’s putters:

Date Item Quantity Unit Cost

Nov. 1 Balance 24 \) 53

6 Sale 20

8 Purchase 30 70

17 Sale 30

30 Sale 2

Requirements

2. Journalize Golf Unlimited’s inventory transactions using the weighted-averageinventory costing method. (Assume purchases and sales are made on account.)

What account is debited when recording the adjusting entry to write down merchandise inventory under the LCM rule?
See all solutions

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