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Chapter 8: Question 15E (page 426)

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.

Short Answer

Expert verified

The net income under the FIFO method is higher by $71,000.

Step by step solution

01

Ending inventory and Income statement under FIFO

Value of ending inventory

Units

Cost per unit

Amount

7000

$30

$210,000

1000

$25

$25,000

Total

8,000

$235,000

Endinginventoryperunitcost=EndinginventoryvalueEndinginventoryunits=235,0008,000=29.375

Condensed Income Statement

Particular

Amount

Sales

$1,050,000

Cost of goods sold:

Opening Stock

$120,000

Add: Purchases

$592,000

Less: Closing stock

$235,000

$477,000

Gross Profit

$573,000

Less: Operating Expenses

$200,000

Net Income

$373,000

02

Ending inventory and Income Statement under LIFO

Value of ending inventory

Units

Cost per unit

Amount

6000

$20

$120,000

2000

$22

$44,000

Total

8,000

$164,000

Endinginventoryperunitcost=EndinginventoryvalueEndinginventoryunits=164,0008,000=20.5

Condensed Income Statement

Particular

Amount

Sales

$1,050,000

Cost of goods sold:

Opening Stock

$120,000

Add: Purchases

$592,000

Less: Closing stock

$164,000

$548,000

Gross Profit

$502,000

Less: Operating Expenses

$200,000

Net Income

$302,000

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Most popular questions from this chapter

Presented below is information related to Dino Radja Company.

Ending Inventory Price

Date (End-of-Year Prices) Index

December 31, 2014 $ 80,000 100

December 31, 2015 115,500 105

December 31, 2016 108,000 120

December 31, 2017 122,200 130

December 31, 2018 154,000 140

December 31, 2019 176,900 145

Instructions

Compute the ending inventory for Dino Radja Company for 2014 through 2019 using the dollar-value LIFO method.

Question:Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet.

1. Goods out on consignment at another company’s store.

2. Goods sold on an installment basis (bad debts can be reasonably estimated).

3. Goods purchased f.o.b. shipping point that are in transit at December 31.

4. Goods purchased f.o.b. destination that are in transit at December 31.

5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that coversall costs related to the inventory.

6. Goods sold where large returns are predictable.

7. Goods sold f.o.b. shipping point that are in transit at December 31.

8. Freight charges on goods purchased.

9. Interest costs incurred for inventories that are routinely manufactured.

10. Costs incurred to advertise goods held for resale.

11. Materials on hand not yet placed into production by a manufacturing firm.

12. Office supplies.

13. Raw materials on which a manufacturing firm has started production but which are not completely processed.

14. Factory supplies.

15. Goods held on consignment from another company.

16. Costs identified with units completed by a manufacturing firm but not yet sold.

17. Goods sold f.o.b. destination that are in transit at December 31.

18. Short-term investments in stocks and bonds that will be resold in the near future.

Instructions

Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not bereported as inventory, indicate how it should be reported in the financial statements.

In an article that appeared in the Wall Street Journal, the phrases “phantom (paper) profits” and “high LIFO profits” through involuntary liquidation were used. Explain the sephrases.

Presented below are transactions related to Tom Brokaw, Inc.

May 10 Purchased goods billed at \(15,000 subject to cash discount terms of 2/10, n/60.

11 Purchased goods billed at \)13,200 subject to terms of 1/15, n/30.

19 Paid invoice of May 10.

24 Purchased goods billed at $11,500 subject to cash discount terms of 2/10, n/30.

Instructions

(a) Prepare general journal entries for the transactions above under the assumption that purchases are to be recorded at net amounts after cash discounts and that discounts lost are to be treated as financial expense.

(b) Assuming no purchase or payment transactions other than those given above, prepare the adjusting entry required on May 31 if financial statements are to be prepared as of that date.

Describe the LIFO double-extension method. Using the following information, compute the index at December 31, 2017, applying the double-extension method to a LIFO pool consisting of 25,500 units of product A and 10,350 units of product B. The base-year cost of product A is \(10.20 and of product B is \)37.00. The price at December 31, 2017, for product A is \(21.00 and for product B is \)45.60. (Round to two decimal places.)
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