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Chapter 8: Q. 8-17E (page 428)

Question:Johnny Football Shop began operations on January 2, 2017. The following stock record card for footballs was taken from the records at the end of the year.

Units Unit Invoice Gross Invoice

Date Voucher Terms Received Cost Amount

1/15 10624 Net 30 50 \(20 \)1,000

3/15 11437 1/5, net 30 65 16 1,040

6/20 21332 1/10, net 30 90 15 1,350

9/12 27644 1/10, net 30 84 12 1,008

11/24 31269 1/10, net 30 76 11 836

Totals 365 $5,234

A physical inventory on December 31, 2017, reveals that 100 footballs were in stock. The bookkeeper informs you that all thediscounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.

Instructions

(a) Compute the December 31, 2017, inventory using the FIFO method.

(b) Compute the 2017 cost of goods sold using the LIFO method.

(c) What method would you recommend to the owner to minimize income taxes in 2017, using the inventory informationfor footballs as a guide?

Short Answer

Expert verified

The value of ending inventory under FIFO and LIFO are $1,112.76 and $1,792, respectively. The LIFO method would fetch less net income and consequently fewer taxes.

Step by step solution

01

Value of ending inventory using FIFO

Date

Gross Invoice Amount

Discount Value

Net Invoice Amount

1/15

$1000

-

$1,000

3/15

$1,040

$10..4

$1029.6

6/20

$1,350

$13.5

$1336.5

9/12

$1,008

$10.08

$997.92

11/24

$836

$8.36

$827.64

Total

$42.34

$5191.66

Costofendinginventory(basedonFIFO)=NetvalueofDec11purchase+NetvalueofDec9purchasefor24units=(76×11-1%)+(24×12-1%)=$827.64+$285.12=$1,112.76

02

Computation of cost of goods sold using LIFO

Date

Gross Invoice Amount

Discount Value

Net Invoice Amount

1/15

$1000

-

$1,000

3/15

$1,040

$10..4

$1029.6

6/20

$1,350

$13.5

$1336.5

9/12

$1,008

$10.08

$997.92

11/24

$836

$8.36

$827.64

Total

$42.34

$5191.66


Costofendinginventory(basedonLIFO)=NetvalueofDec1purchase+NetvalueofDec3purchasefor24units=(50×20)+(50×16-1%)=$1,000+$792=$1,792


Costofgoods(basedonLIFO)=TotalNetvaluepurchase-costofendinginventory=$5,234+$1,792=$3,442

03

Inventory valuation method to minimize taxes

Under the FIFO method, the cost of goods sold is valued at the historic cost. Whereas in the LIFO method, the COGS is valued at the current prices. So the COGs would be highest under the LIFO method, and the net profit would be lower.

Thus, the owner should use the LIFO method to minimize the taxes.

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Most popular questions from this chapter

Case 1: T J International

T J International was founded in 1969 as Trus Joist International. The firm, a manufacturer of specialty building products, has its headquarters in Boise, Idaho. The company, through its partnership in the Trus Joist MacMillan joint venture, develops and manufactures engineered lumber. This product is a high-quality substitute for structural lumber and uses lower-grade wood and materials formerly considered waste. The company also is majority owner of the Outlook Window Partnership, which is a consortium of three wood and vinyl window manufacturers.

Following is T J International’s adapted income statement and information concerning inventories from its annual report.

T J International

Sales \(618,876,000

Cost of goods sold 475,476,000

Gross profit 143,400,000

Selling and administrative expenses 102,112,000

Income from operations 41,288,000

Other expense 24,712,000

Income before income tax 16,576,000

Income taxes 7,728,000

Net income \) 8,848,000

Inventories.Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following:

Current Year Prior Year

Finished goods \(27,512,000 \)23,830,000

Raw materials and

work-in-progress 34,363,00033,244,000

61,875,000 57,074,000

Reduction to LIFO cost (5,263,000) (3,993,000)

\(56,612,000 \)53,081,000

The last-in, first-out (LIFO) method is used for determining the cost of lumber, veneer, Microllamlumber, TJI joists, and open web joists. Approximately 35 percent of total inventories at the end of the current year were valued using the LIFO method. The first-in, first-out (FIFO) method is used to determine the cost of all other inventories.

Instructions

(a) How much would income before taxes have been if FIFO costing had been used to value all inventories?

(b) If the income tax rate is 46.6%, what would income tax have been if FIFO costing had been used to value all inventories ? In your opinion, is this difference in net income between the two methods material? Explain.

(c) Does the use of a different costing system for different types of inventory mean that there is a different physical flow of goods among the different types of inventory? Explain.

Distinguish between product costs and period costs as they relate to inventory.

Ann M. Martin Company makes the following errors during the current year.

(Evaluate each case independently and assume ending inventory in the following year is correctly stated.)

1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.

2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recordedand paid for in the following year.)

3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paidfor in the following year.)

Instructions

Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.

Norman’s Televisions produces television sets in three categories: portable, midsize, and flat-screen. On January 1, 2017, Norman adopted dollar-value LIFO and decided to use a single inventory pool. The company’sJanuary 1 inventory consists of:

Category Quantity Cost per Unit Total Cost

Portable 6,000 \(100 \) 600,000

Midsize 8,000 250 2,000,000

Flat-screen 3,000 400 1,200,000

17,000 \(3,800,000

During 2017, the company had the following purchases and sales.

QuantitySelling Price

Category Purchased Cost per Unit Sold per Unit

Portable 15,000 \)110 14,000 $150

Midsize 20,000 300 24,000 405

Flat-screen 10,000 500 6,000 600

45,000 44,000

Instructions

(Round to four decimals.)

(a) Compute ending inventory, cost of goods sold, and gross profit.

(b) Assume the company uses three inventory pools instead of one. Repeat instruction (a).

George Solti, the controller for Garrison Lumber Company, has recently hired you as assistant controller. He wishes to determine your expertise in the area of inventory accounting and therefore asks you to answer thefollowing unrelated questions.

(a) A company is involved in the wholesaling and retailing of automobile tires for foreign cars. Most of the inventory is imported,and it is valued on the company’s records at the actual inventory cost plus freight-in. At year-end, the warehousing costs areprorated over cost of goods sold and ending inventory. Are warehousing costs considered a product cost or a period cost?

(b) A certain portion of a company’s “inventory” is composed of obsolete items. Should obsolete items that are not currentlyconsumed in the production of “goods or services to be available for sale” be classified as part of inventory?

(c) A company purchases airplanes for sale to others. However, until they are sold, the company charters and services theplanes. What is the proper way to report these airplanes in the company’s financial statements?

(d) A company wants to buy coal deposits but does not want the financing for the purchase to be reported on its financialstatements. The company therefore establishes a trust to acquire the coal deposits. The company agrees to buy the coalover a certain period of time at specified prices. The trust is able to finance the coal purchase and pay off the loan as itis paid by the company for the minerals. How should this transaction be reported?
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