Question

Johnson Corporation began the year with inventory of 16,000 units of its only product. The units cost $8 each. The company uses a perpetual inventory system and the FIFO cost method. The following transactions occurred during the year:

1. Purchased 80,000 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. 1,600 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 75,000 units at $17 per unit.
4. On December 28, Johnson purchased 5,600 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. 19,400 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 $162,000, 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 $16,200.

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 $162,000.

Answer 1

1)

Using FIFO
Date	Purchases			Cost of goods sold			Inventory
	Qty	Rate	Value	Qty	Rate	Value	Qty	Rate	Value
Opening							16,000	$             8	$    1,28,000
a	80,000	12.26	$    9,80,800				16,000	$             8	$    1,28,000
							80,000	12.26	$    9,80,800
b	(1,600)	12.26	$     (19,616)				16,000	$             8	$    1,28,000
							78,400	12.26	$    9,61,184
c				16,000	$             8	$ 1,28,000	19,400	$          12	$    2,37,844
				59,000	12.26	$ 7,23,340
d *							19,400	$          12	$    2,32,800
e	Balances					$ 8,51,340			$    2,32,800

working:

Calculation cost of inventory purchased
Purchase price	12
Freight	0.5
Less: discount (12*2%)	-0.24
Total cost	12.26

Since it is given that freight is paid by the company it should be considered in the cost of inventory. Also deducted from cost of inventory when goods are returned because credit is given.

d* - Material purchased with FOB destination point should not be part of inventory because in FOB destination contract ownership of the goods is with the supplier till the goods are delivered at the buyer place of business. In this case at the end of the year goods are not delivered yet.

Cost of Inventory - $232,800

Cost of goods sold - $851,340

2)

Sales (75000*17)	$        12,75,000
Expenses
Cost of goods sold	$          8,51,340
Operating expenes	$          1,62,000
	$        10,13,340
Income before taxes	$          2,61,660

3)

LIFO reserve = FIFO inventory - LIFO Inventory

Using LIFO
Date	Purchases			Cost of goodss sold			Inventory
	Qty	Rate	Value	Qty	Rate	Value	Qty	Rate	Value
Opening							16,000	$             8	$    1,28,000
a	80,000	12.26	$    9,80,800				16,000	$             8	$    1,28,000
							80,000	12.26	$    9,80,800
b	(1,600)	12.26	$     (19,616)				16,000	$             8	$    1,28,000
							78,400	12.26	$    9,61,184
c				75,000	12.26	$ 9,19,500	16,000	$             8	$    1,28,000
							3,400	$          12	$        41,684
d							16,000	$             8	$    1,28,000
d							3,400	$          12	$        41,684
e	Balances					$ 9,19,500			$    1,69,684

LIFO reserve	232,800-169,684
LIFO reserve at the end of year	$        63,116
Beginning balance	$        16,200
Adjustment to LIFO reserve	$        46,916

`

4)

Sales (75000*17)	$ 12,75,000
Expenses
Cost of goods sold	$    9,19,500
Operating expenes	$    1,62,000
	$ 10,81,500
Income before taxes	$    1,93,500