Question

Johnson corporation began the year with  inventory of 14,000 units of its only product. units cost $8 each. The company uses a Perpetual inventory system and the fifo cost method. The following transactions occurred during the year:
a. purchase 70,000 additional units at a cost of $10 per unit. Terms of the purchases were 2 /10 n/ 30, and 100% of the purchases were paid within the 10-day discount. The company uses the gross method to record purchase discounts. The merchandise was purchased f. O. B. Shipping point and Freight charges of $0.40 per unit were paid by Johnson.
b. 1400 units purchased during the year will return to suppliers for credit. Johnson was also given credit for the freight charges of $0.40 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 65,000 units at $18 per unit.
d. on December 28th Johnson purchased 5400 additional units at $10 each. The goods were shipped f. O. B. Destination and arrived at Johnson's Warehouse on January 4th of the following year
e. 17600 units were on hand at the end of the year.

required:
1. for financial reporting purposes, the company uses lifo (amounts based on the 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 it's $15,800
2. 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 $158,000

 

Answer 1

1.  

	units	cost	cost		cogs $	cogs	sale $	sales
a	70,000.00	10.30	721,000.00
			-
b	(1,400.00)	0.50	(700.00)
c				14,000.00	8.00	112,000.00	18.00	252,000.00
d		10.00	-	51,000.00	10.30	525,300.00	18.00	918,000.00
beg bal	14,000.00	8.00				637,300.00		1,170,000.00
	82,600.00		720,300.00
	10.50
	(0.20)
	10.30

Answer 2

2. 

sales	1,170,000.00
cogs	(637,300.00)
op exp	(158,000.00)
income b4 tax	374,700.00

Answer 3

1.
Even though specific dates for purchases and sales of inventory are not given, amounts for ending inventory and cost of goods sold under FIFO are the same using calculations under a periodic or perpetual inventory system. Therefore, we can calculate perpetual FIFO as follows:

Beginning inventory (14,000 × $8.00)					$	112,000
Net purchases:
Purchases (70,000* units × $10.00)	$	700,000
Less: Purchase returns (1,400 units × $10.50)		(14,700	)
Less: Purchase discounts ($686,000 × 2%)		(13,720	)
Plus: Freight-in (70,000 units × $0.50)		35,000				706,580
Cost of goods available (82,600 units)						818,580
Less: Ending inventory (below)						(181,280	)
Cost of goods sold (65,000 units)					$	637,300

*The 5,400 units purchased on December 28 are not included. The merchandise was shipped f.o.b. destination and did not arrive at Johnson’s warehouse until the following year.
 
Cost of ending inventory:

Date of purchase	Units	Unit cost			Total cost
During the year	17,600		10.30	**		$	181,280

**($10 × 98%) + $0.50 per unit freight-in charge = $10.30 per unit
 
2.

Sales (65,000 units × $18.00)				$	1,170,000
Less:
Cost of goods sold (above)	$	637,300
Other operating expenses		158,000			(795,300	)
Income before income taxes				$	374,700

3.
Cost of ending inventory under LIFO (periodic inventory system):
 

Date of purchase	Units	Unit cost			Total cost
Beginning inventory	14,000	$	8.00			$	112,000
During the year	3,600		10.30	**			37,080
Total	17,600					$	149,080

***($10 × 98%) + $0.50 per unit freight-in charges = $10.30

LIFO Reserve 

Perpetual FIFO (Required 1)	$	181,280
Less: Periodic LIFO (above)		(149,080	)
LIFO Reserve	$	32,200

LIFO reserve ($32,200 − $15,800) = $16,400


4.

Sales (65,000 units × $18.00)				$	1,170,000
Less:
Cost of goods sold****	$	653,700
Other operating expenses		158,000			(811,700	)
Income before income taxes				$	358,300

**** $637,300 (Required 2 using FIFO) + $16,400 (Required 3 LIFO reserve adjustment) = $653,700.