Holliday Company\'s inventory records show the following data: Units Unit Cost I

Question

Holliday Company's inventory records show the following data:

Units Unit Cost

Inventory, January 1 5,000 $9.00
Purchases: June 18 4,500 8.00
November 8 3,000 7.00


A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for $12 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. What is the difference in taxes if LIFO rather than FIFO is used?

$800 additional taxes
$4,000 additional taxes
$3,200 tax savings
$4,000 tax savings

Explanation / Answer

Inventory, January 1 5,000 @ $9.00 = $45,000 Purchases: June 18 4,500 @ $8.00 = $36,000 November 8 3,000 @ $7.00 = $21,000 Sold 10,500 units A physical inventory on December 31 shows 2,000 units on hand. W.B. Reindeer sells the units for $12 each. The company has an effective tax rate of 20%. Reindeer uses the periodic inventory method. Under FIFO method, December 31 inventory is valued at a. $14,000 2000 units at the latest cost of $7 each = $14,000 COGS = $102,000 - $14,000 = $88,000 What is the cost of goods available for sale? $102,000 Under lifo method cost of goods sold is? Ending inventory is 2000 units at earliest cost of $9 each = $18,000. COGS = $102,000 - $18,000 = 84,000 The weighted-average cost per unit is? $102,000/12,500 units = $8.16 If the company uses FIFO what is the gross profit for the period? Sales = 10,500 x $12 = $126,000 less COGS $88,000 = Gross Profit $38,000 Tax at 20% = $7,600 What is the difference in taxes if LIFO rather than FIFO is used? Sales $126,000 less COGS $84,000 = Gross profit $42,000 Tax at 20% = $8,400, so tax is $800 higher than if FIFO is used.

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