In its first month of operation, Maze Company purchased 100 units of inventory f
ID: 2380219 • Letter: I
Question
In its first month of operation, Maze Company purchased 100 units of inventory for $6, then 200 units for $7, and finally 150 units for $8. At the end of the month, 180 units remained. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO. The company uses the periodic method.
BE6-5 In its first month of operation, Maze Company purchased 100 units of inventory for $6, then 200 units for $7, and finally 150 units for $8. At the end of the month, 180 units remained. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO. The company uses the periodic method. Phantom Profit $Explanation / Answer
Units Purchased = 100 units @ $6, 200 units @ $7, 150 units @ $8
If FIFO method is followed, the closing inventory of 180 units would comprise of last 150 units purchased @ $8 and 30 units of the lot of 200 units purchased @ $7
Therefore Closing Inventory = 150 * 8 + 30 * 7 = $1410
If LIFO method is followed, the closing inventory of 180 units would comprise of the first 100 units purchased @ $6 and 80 units of the lot of 200 units purchased @ $7
Therefore Closing Inventory = 100 * 6 + 80 * 7 = $1160
Phantom profit is the illusionary profit the organisation makes becuase of the different methods of accounting for inventory. So if Maze Co. chooses FIFO over LIFO, they'd make a phantom profit of (1410-1160) = $250.
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