Question

Required information Use the following information for the Exercises below. (The following information applies to the questions displayed below.] Laker Company reported the following January purchases and sales data for its only product. Date Activities Jan. Beginning inventory Jan. 10 Sales Jan. 20 Purchase Jan. 25 Sales Jan. 30 Purchase Totals Units Acquired at Cost Units sold at Retail 185 units @ $11.00 - $2,035 145 units @ $20.00 100 units @ $10.00 - 1,000 125 units @ $20.00 270 units @ $ 9.50 - 2,565 555 units $5,600 270 units Exercise 5-4 Periodic: Income effects of inventory methods LO A1 For specific identification, ending inventory consists of 285 units, where 270 are from the January 30 purchase, 5 are from the January 20 purchase, and 10 are from beginning inventory. Required: 1. Prepare comparative income statements for the month of January for Laker Company for the four inventory methods. Assume expenses are $1,700, and that the applicable income tax rate is 40%. 2. Which method yields the highest net income? 3. Does net income using weighted average fall above, between, or below that using FIFO and LIFO? 4. If costs were rising instead of falling, which method would yield the highest net income?

Answer 1

Please find below table useful to compute desired results: -

C D E F G H I M N OR B Activities A 1 Date 2 3 4. Jan. 1 5 Jan. 10 6 Jan. 20 Purchased Rate Cost Units Beginning Sales Purchase 100 10 =C6*D6 Sales 8 Jan. 25 9 10 Jan. 30 11 Purchase 270 19.5 =C10*D10 12 13 Sales 15 units Cost 16 17 145 =E16 18 19 20 =D18 =E18 =125-A20 =E19 FIFO Balance Cost Units Rate 185 11 =A17*B17 =D16-A17=E16 =D17 =E17 =C6 =D6 =A20*B20 =A21*B21 =D19-A21 =E19 =D21 =E21 =C10 =D10 LIFO Weighted average Sales Balance Sales Balance Cost Units Rate Cost Units Rate Cost Units Rate Units Rate Cost =D16*E16 185 11 =J16*K16 185 =P16*016 =D17*E17 145 |=K16 |=G17*H17 |=J16-G17 =K16 |=J17*K17 145 =016 =M17*N17 I=P16-M17 =Q16 I=P17*017 =D18*E18 =J17 =K17 =J18*K18 -P17 =Q17 =P18*018 =D19*E19 =C6 =D6 =J19*K19 =C6 =D6 =P19*019 =J19 =K19 =G20*H20 125 =(Q18+Q19)/2 =M20*N20 =(P18+P19)-M20 =(Q18+Q19)/2 =P20*020 =D21*E21 =125-G20 =K18 =G21*H21 =J18-G21 =K18 =J21*K21 =D22*E22 =K21 =L21 =P20 =020 =R20 =D23*E23 =C10 =D10 =E10 =C10 =D10 =E10 21 22

B DE 24 25 Specific Identification 26 Sales =270*20 27 Cost of goods sold =95*10+175*11 28 Gross profit =B26-B27 29 Expenses 1700 30 Income before Taxes =B28-B29 31 Less: Tax =B30*0.4 32 Net income =B30-B31 =A13 =G13 =M13 =270*20 =270*20 =270*20 =C17+C20-C21 =117+120+121 =017+020 =C26-C27 =D26-D27 =E26-E27 1700 1700 1700 =C28-C29 =D28-D29 =E28-E29 =C30*0.4 =D30*0.4 =E30*0.4 =C30-C31 =D30-D31 =E30-E31

End Results would appear as follows: -

E C D Purchased Units Rate Cost 4 Jan. 1 5 Jan. 10 6 Jan. 20 7 8 Jan. 25 Beginning Sales Purchase 100 101 F G H I J K L M N O P Q R S T U V W Sales Balance Sales Balance Sales Balance units Rate Cost Units Rate Cost Units Rate Cost Units Rate Cost Units Rate Cost Units Rate Cost 185 11 2035 185 11 2035 185 11 2035 145 11 1595 40 11 440 145 11 1595 40 11 440 145 11 1595 40 11 440 1000 401 11 440 40 11 440 401 11 440 100 101000 100 101000 100 100 1000 1 40 11 440 100 101000 125 10.5 1312.5 15 10.5 157.5 85 10 850 15 10 150 25 11 275 15 11 165 2565 15 10 150 | 15 11 165 15 10.5 157.5 270 9.5 2565 270 9.5 2565 270 9.5 2565 Sales 9 Purchase 270 9.5 10 Jan. 30 11 12 14 Sales 15 Cost of goods sold 16 Gross profit 17 Expenses 18 Income before Taxes 19 Less: Tax 20 Net income Specific Identification FIFO LIFO Weighted average 5400 5400 5400 5400 2875 2885 2870 2907.5 2525 2515 2530 2492.5 1700 1700 1700 1700 825 815 830 792.5 330 326 332 317 495 489 498 475.5 21 22 b. LIFO YES FIFO