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Chapter 6: Q37PGB_3 (page 372)

Right Now Electronic Center began October with 100 units of merchandise inventory that cost \(70 each. During October, the store made the following purchases:

Oct. 3 35 units @ \) 82 each

12 45 units @ \( 84 each

18 75 units @ \) 90 each

Right Now uses the periodic inventory system, and the physical count at October 31indicates that 130 units of merchandise inventory are on hand.

Requirements

3. Which method will result in the lowest income taxes for Right Now? Why? Whichmethod will result in the highest net income for Right Now? 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

Method yielding the lowest income tax

Under LIFO, the net income would be the lowest as the COGS is valued at the current prices. In the given case, the gross income under LIFO is lowest at $15,060.

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 $16,950.

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Most popular questions from this chapter

Question:New York Pool Supplies’s merchandise inventory data for the year ended December 31, 2019, follow:

Net Sales Revenue\( 58,000

Cost of Goods Sold:

Beginning Merchandise Inventory\) 4,900

Net Cost of Purchases 32,500

Cost of Goods Available for Sale37,400

Less: Ending Merchandise Inventory 4,700

Cost of Goods Sold32,700

Gross Profit \( 25,300

Requirements

1. Assume that the ending merchandise inventory was accidentally overstated by\)1,800. What are the correct amounts for cost of goods sold and gross profit?

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

1. Journalize the adjusting entry for merchandise inventory, if any is required.

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

3. At what amount should the company report cost of goods sold on the income statement?

When does an inventory error cancel out, and why?

Question:Empire State Carpets’s books show the following data. In early 2020, auditors foundthat the ending merchandise inventory for 2017 was understated by \(8,000 and thatthe ending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.

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

Requirements

2. State whether each year’s net income—before your corrections—is understated oroverstated, and indicate the amount of the understatement or overstatement.
See all solutions

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