Learning Materials
Features
Discover
Chapter 8: 17Q (page 421)
Explain the following terms.
(a) LIFO layer.
(b) LIFO reserve.
(c) LIFO effect.
LIFO method tackles the different issues. These issues are related to the LIFO layer, LIFO reserve, and LIFO effect.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
(FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at \(8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is \)400,000.
The company has made the following forecasts for the period 2017–2019.
2017 | 2018 | 2019 | |
Unit sales (in millions of units) | 1.1 | 1.0 | 1.3 |
Sales price per unit | \(10 | \)12 | \(12 |
Unit purchases (in millions of units) | 1.0 | 1.1 | 1.2 |
Purchase price per unit | \)8 | \(9 | \)10 |
Annual depreciation (in thousands of dollars) | \(300 | \)300 | \(300 |
Cash dividends per share | \)0.15 | \(0.15 | \)0.15 |
Cash payments for additions to and replacement of plant and equipment (in thousands of dollars) | \(350 | \)350 | $350 |
Income tax rate | 40% | 40% | 40% |
Operating expenses (exclusive of depreciation) as a percent of sales | 15% | 15% | 15% |
Common shares outstanding (in millions) | 1 | 1 | 1 |
Instructions
a. Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2017–2019. Assume the company would begin LIFO at the beginning of 2017.
Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.
b. Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.
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.
Question:Included in the December 31 trial balance of Rivera Company are the following assets.
Cash \( 190,000 Work in process \)200,000
Equipment (net) 1,100,000 Accounts receivable (net) 400,000
Prepaid insurance 41,000 Patents 110,000
Raw materials 335,000 Finished goods 170,000
Prepare the current assets section of the December 31 balance sheet.A
How might a company obtain a price index in order to apply dollar-value LIFO?
Assume that in an annual audit of Harlowe Inc. at December 31, 2017, you findthe following transactions near the closing date.
1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shippingroom on December 31, 2017. The customer was billed on that date and the machine excluded from inventory althoughit was shipped on January 4, 2018.
2. Merchandise costing \(2,800 was received on January 3, 2018, and the related purchase invoice recorded January 5. Theinvoice showed the shipment was made on December 29, 2017, f.o.b. destination.
3. A packing case containing a product costing \)3,400 was standing in the shipping room when the physical inventory wastaken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigationrevealed that the customer’s order was dated December 18, 2017, but that the case was shipped and the customer billedon January 10, 2018. The product was a stock item of your client.
4. Merchandise received on January 6, 2018, costing \(680 was entered in the purchase journal on January 7, 2018. The invoiceshowed shipment was made f.o.b. supplier’s warehouse on December 31, 2017. Because it was not on hand at December31, it was not included in inventory.
5. Merchandise costing \)720 was received on December 28, 2017, and the invoice was not recorded. You located it in thehands of the purchasing agent; it was marked “on consignment.”
Instructions
Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, andgive your reason for your decision on each item.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App