Question

Johnson Corporation began the year with inventory of 27,000 units of its only product. The units cost $7 each. The company uses a perpetual inventory system and the FIFO cost method. The following transactions occurred during the year:

1. Purchased 135,000 additional units at a cost of $12 per unit. Terms of the purchases were 2/10, 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. 2,700 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 130,000 units at $18 per unit.
4. On December 28, Johnson purchased 6,700 additional units at $10 each. The goods were shipped f.o.b. destination and arrived at Johnson’s warehouse on January 4 of the following year.
5. 29,300 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 $184,000, 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 $18,400.

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 $184,000.

Answer 1

The answer is attached as a picture

op 이 (LIFO Cast of goods sold Inventory No. aly Role value aly Rale value aty Rose value 27,000 7 189,000 135,000 12.26 1,655,000 135,000 12.26 1,655, loo 27,000 7 189poo b (2,700) 12:26 (33,102) 132,300 12:26 1,821,998 22000 7 189,000 130700 12.26 159380 2,300 12.26 28,198 27000 7 189000 e Balonces 1993,800 217,198 Ending Kifo Reserve = 388925–217,1985 M2, p27 opening ifo benene 18 400 Adjustment tot 4 to resente 123327 18 Ending Lito resove = 359, 218-211, ad = 142,020 opening Lito resere 18,400 Adnstment to clfo resente 123620 Sales (130,000 X 18) 2,340,000 Cost of good sold = (1,593,800 ) operating expenses (184,000) Income before hores 562,200 The difference between both protits (FIFO us 40) is 704,220-563200 = 142,020 Scanned with canh bisher Is nothing but Ending lifo seseove 0 1 8 Friday less i

Note :

While calculating profit before taxes, we can also make LIFO reserve adjustment and find the revised profit before taxes. In this answer we have not opted to adjust that to profit, we can also do alternatively.

We have ignored (d) point because the goods are sent as FOB destination, so the ownership passes to buyer only when they reach the destination. So we do not recognise them while they are in shipment at year end