Question

Problem 8-7

The management of Indigo Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventories on the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO would have been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. The following are the company’s financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

		Financial Position as of
		12/31/16		12/31/17		12/31/18
Cash		$ 90,900		$130,200		$155,200
Accounts receivable		81,400		99,900		124,800
Inventory		124,800		140,900		173,300
Other assets		159,800		173,200		201,900
Total assets		$456,900		$544,200		$655,200
Accounts payable		$ 39,700		$ 60,400		$ 81,400
Other liabilities		72,500		80,000		107,300
Common stock		201,900		201,900		201,900
Retained earnings		142,800		201,900		264,600
Total liabilities and equity		$456,900		$544,200		$655,200

			Income for Years Ended
			12/31/17		12/31/18
Sales revenue			$909,600		$1,452,800
Less:	Cost of goods sold		508,700		764,900
	Other expenses		206,800		309,400
			715,500		1,074,300
Income before income taxes			194,100		378,500
	Income taxes (40%)		77,640		151,400
Net income			$116,460		$ 227,100

Other data:

1.		Inventory on hand at December 31, 2016, consisted of 41,600 units valued at $3 each.
2.		Sales (all units sold at the same price in a given year):
			2017-151,600 units @ $6 each				2018-181,600 units @ $8.00 each
3.		Purchases (all units purchased at the same price in given year):
			2017-151,600 units @ $3.70 each				2018-181,600 units @ $4.70 each
4.		Income taxes at the effective rate of 40% are paid on December 31 each year.

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFO had been used, and state the new amount for each account that is named.

Account		New amount for 2018
Other ExpensesOther LiabilitiesAccounts PayableCashIncome TaxesAccounts ReceivableCommon StockCost of Goods SoldInventoryRetained Earnings		$
Other ExpensesAccounts PayableInventoryAccounts ReceivableCashCost of Goods SoldOther LiabilitiesCommon StockIncome TaxesRetained Earnings
Accounts ReceivableCommon StockIncome TaxesOther ExpensesOther LiabilitiesAccounts PayableCashInventoryRetained EarningsCost of Goods Sold
Accounts PayableOther LiabilitiesCost of Goods SoldOther ExpensesCommon StockAccounts ReceivableInventoryCashRetained EarningsIncome Taxes
Other ExpensesIncome TaxesAccounts PayableAccounts ReceivableRetained EarningsOther LiabilitiesCashCommon StockCost of Goods SoldInventory

Answer 1

Following accounts will get affected from the decision and their calculation is as follows: -

A В C Calculation of Inventory and COGS 1 Units 41600 1516003.7 5 Goods available for Sale (2017) B3+B4 -C4 Rate Cost -B3*C3 B4*C4 =D3+D4 =B6*C6 -D5-D6 2 Particulars 3 Inventory (Dec. 2016) 4 Add: Purchase (2017) 151600 -B5-B6 4.7 9 Goods available for Sale (2018)B7+B8 -C8 6 Less: COGS (2017) 7 Inventory (Dec. 2017) 8Add: Purchase (2018) =B8*C8 -D7+D8 B10 C10 =D9-D10 181600 181600 10 Less: COGS (2018) -B9-B10-D11/B11 11 Inventory (Dec. 2018) 12 Calculation of Net income and Income tax for 2018 2018 1452800 -D10 |309400 13 2017 909600 ED6 206800 14 Particulars 15 Sales Revenue 16 Less: COGS 17 Less: Other expenses -C15-C16-C17D15-D16-D17 -C18*0.4 -C18-C19 18 Income before Income taxes =D18 0.4 =D18-D19 19 Less: Tax 20 Net Income 21 2017 142800 -C20 -C23+C24 2018 -C25 =D20 -D23+D24 22 Calculation of Retained Eamings 23 Opening balance 24 Add Net income 25 Ending Balance

Highlighted cells are the end amounts

A. B C Calculation of Imnventory and COGS 1 2 Particulars Units Rate Cost 3 Inventory (Dec. 2016) 4 Add: Purchase (2017) 41,600 S 151,600 S 5 Goods available for Sale (2017) 193,200 151,600 S 3.00 124,800 3.70 S560,920 S 685,720 3.70 S 560,920 S 124,800 4.70 853,520 S 978,320 4.70 853,520 3.00 124,800 6 Less: COGS (2017) 7 Inventory (Dec. 2017) 8 Add: Purchase (2018) 41,600 181,600 S 9 Goods available for Sale (2018) 223,200 181,600 S 41,600 S 10 Less: COGS (2018) 11 Inventory (Dec. 2018) 12 Calculation of Net income and Income tax for 2018 13 S 2,017.00 S $909,600.00 S1,452,800 S560,920.00 S 853,520 $ 206,800.00 $ 309.400 S141,880.00 S 289,880 S 56,752.00 $ 115,952 S 85,128.00 $ 173,928 14 Particulars 2,018 15 Sales Revenue 16 Less: COGS 17 Less: Other expenses 18 Income before Income taxes 19 Less: Tax 20 Net Income S 2,017.00 S $142,800.00 S 227,928 S 85,128.00 S 173,928 $227,928.00 $ 401,856 22 Calculation of Retained Earnings 2,018 23 Opening balance 24 Add Net income 25 Ending Balance 21