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Q. 8-17E

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Intermediate Accounting (Kieso)
Found in: Page 428

Short Answer

Question: Johnny Football Shop began operations on January 2, 2017. The following stock record card for footballs was taken from the records at the end of the year.

Units Unit Invoice Gross Invoice

Date Voucher Terms Received Cost Amount

1/15 10624 Net 30 50 $20 $1,000

3/15 11437 1/5, net 30 65 16 1,040

6/20 21332 1/10, net 30 90 15 1,350

9/12 27644 1/10, net 30 84 12 1,008

11/24 31269 1/10, net 30 76 11 836

Totals 365 $5,234

A physical inventory on December 31, 2017, reveals that 100 footballs were in stock. The bookkeeper informs you that all thediscounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.

Instructions

(a) Compute the December 31, 2017, inventory using the FIFO method.

(b) Compute the 2017 cost of goods sold using the LIFO method.

(c) What method would you recommend to the owner to minimize income taxes in 2017, using the inventory informationfor footballs as a guide?

The value of ending inventory under FIFO and LIFO are $1,112.76 and $1,792, respectively. The LIFO method would fetch less net income and consequently fewer taxes.

See the step by step solution

Step by Step Solution

Value of ending inventory using FIFO

Date

Gross Invoice Amount

Discount Value

Net Invoice Amount

1/15

$1000

-

$1,000

3/15

$1,040

$10..4

$1029.6

6/20

$1,350

$13.5

$1336.5

9/12

$1,008

$10.08

$997.92

11/24

$836

$8.36

$827.64

Total

$42.34

$5191.66

Computation of cost of goods sold using LIFO

Date

Gross Invoice Amount

Discount Value

Net Invoice Amount

1/15

$1000

-

$1,000

3/15

$1,040

$10..4

$1029.6

6/20

$1,350

$13.5

$1336.5

9/12

$1,008

$10.08

$997.92

11/24

$836

$8.36

$827.64

Total

$42.34

$5191.66

Inventory valuation method to minimize taxes

Under the FIFO method, the cost of goods sold is valued at the historic cost. Whereas in the LIFO method, the COGS is valued at the current prices. So the COGs would be highest under the LIFO method, and the net profit would be lower.

Thus, the owner should use the LIFO method to minimize the taxes.

Most popular questions for Business-studies Textbooks

The management of Tritt Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing 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 $ 90,000 $130,000 $154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets $450,000 $540,000 $650,000

Accounts payable $ 40,000 $ 60,000 $ 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity $450,000 $540,000 $650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue $900,000 $1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income $114,000 $ 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at $3.00 each.

2. Sales (all units sold at the same price in a given year):

2017—150,000 units @ $6.00 each 2018—180,000 units @ $7.50 each

3. Purchases (all units purchased at the same price in given year):

2017—150,000 units @ $3.50 each 2018—180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

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

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