Question

Johnson Corporation began the year with inventory of 28,000 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:

A.Purchased 140,000 additional units at a cost of $10 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 $0.60 per unit were paid by Johnson.

B. 2,800 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $0.60 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.

C. Sales for the year totaled 135,000 units at $17 per unit.

D. On December 28, Johnson purchased 6,800 additional units at $10 each.

E. The goods were shipped f.o.b. destination and arrived at Johnson’s warehouse on January 4 of the following year. 30,200 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 $186,000, 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 $18,600. 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 $186,000.

Answer 1

1.

Beginning inventory	0
2018 Purchases	317100
Ending inventory	317100

Workings:

Purchases	302000	[30200*10 ]
Freight in	18120	[30200*0.6]
Less: Purchase discounts	3020	[30200*10*1%]
2018 purchases	317100

Beginning Inventory		224000
Net purchases:
Purchases	1400000
Freight in [140,000*0.5]	84000
Purchase discounts [140,000-2800 *10*1%]	-13720
Returns [2800*10.6]	-29680	1440600
Cost of goods available for sale		1664600
Less: Ending inventory		317100
Cost of goods sold		1347500

2.

Sales	2295000
Less: Cost of goods sold	1347500
Operating expenses	186000
Income before income taxes	761500

3.

Account Titles	Debit	Credit
Cost of Goods Sold	51400
LIFO Reserve		51400

Ending inventory under LIFO

Beginning inventory	224000
2018 Purchases	23100
Ending inventory	247100

Difference in FIFO and LIFO = 317100 - 247100 = 70000

LIFO reserve = 70,000 -18600 = 51400

4.

Beginning Inventory		224000
Net purchases:
Purchases	1400000
Freight in [140,000*0.5]	84000
Purchase discounts [140,000-2800 *10*1%]	-13720
Returns [2800*10.6]	-29680	1440600
Cost of goods available for sale		1664600
Less: Ending inventory		247100
Cost of goods sold		1417500

Sales	2295000
Less: Cost of goods sold	1417500
Operating expenses	186000
Income before income taxes	691500