Question

Johnson Corporation began the year with inventory of 29,000 units of its only product. The units cost $9 each. The company uses a perpetual inventory system and the FIFO cost method. The following transactions occurred during the year:

1. Purchased 145,000 additional units at a cost of $12 per unit. Terms of the purchases were 1/10, n/30, and 100% of the purchases were paid for within the 10-day discount period. The company uses the gross method to record purchase discounts. The merchandise was purchased f.o.b. shipping point and freight charges of $0.50 per unit were paid by Johnson.

2. 2,900 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $0.50 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.

3. Sales for the year totaled 140,000 units at $18 per unit.

4. On December 28, Johnson purchased 6,900 additional units at $12 each. The goods were shipped f.o.b. destination and arrived at Johnson’s warehouse on January 4 of the following year.

5. 31,100 units were on hand at the end of the year.

 
Required:

1. Determine ending inventory and cost of goods sold at the end of the year.

2. Assuming that operating expenses other than those indicated in the above transactions amounted to $188,000, determine income before income taxes for the year.

3. For financial reporting purposes, the company uses LIFO (amounts based on a periodic inventory system). Record the year-end adjusting entry for the LIFO reserve, assuming the balance in the LIFO reserve at the beginning of the year is $18,800.

4. Determine the amount the company would report as income before taxes for the year under LIFO. Operating expenses other than those indicated in the above transactions amounted to $188,000.

  

Answer 1

Requirement 1 :
Calculation of Ending Inventory and cost of goods sold
Particular	Amount ($)	Amount ($)
Beginning Inventory ( 29000 * 9 )		261000
Net Purchases
Purchases ( 145000 * 12 )	1740000
Less : Return ( 2900 * 12.5)	-36250
Less : Purchase discount ((145000-2900)*12* 1% )	-17052
Add : Freight - in ( 145000 * 0.5 )	72500	1759198
Cost of goods available		2020198
Less: Ending Inventory ( See working )		-385018
Cost of goods sold		1635180
Working :
Calculation of ending Inventory
Number of units	31100
Unit Cost ( 12 * 99% ) + 0.5	12.38
Ending Inventory ( 31100 * 12.38)	385018
Requirement 2 :
Calculation of Income before income taxes
Particular	Amount ($)
Sales ( 140000 * 18)	2520000
Less: Cost of goods sold	-1635180
Gross profit	884820
Less: Other Operating Expenses	-188000
Income before income taxes	696820
Requirement 3 :
General Journal	Debit ($)	Credit ($)
Cost of goods sold	79220
LIFO Reserve		79220
Working :
Date of purchase	Units	Unit cost	Total Cost
Beginning Inventory	29000	9	261000
During the year	2100	12.38	25998
	31100		286998
Calculation of LIFO Reserve
Perpetual FIFO	385018
Less: Periodic LIFO	-286998
	98020
Less: Beginning Reserve	-18800
LIFO Reserve	79220
Requirement 4 :
Calculation of income before taxes
Particular	Amount ($)
Sales (140000 * 18 )	2520000
Less: Cost of goods sold ( 1635180 + 79220 )	-1714400
Gross profit	805600
Less: Other operating Expenses	-188000
Income before taxes	617600