The purchase schedule for Laundryman\'s Corporation is as follows: Date February

Question

The purchase schedule for Laundryman's Corporation is as follows: Date February 10 May 15 October 20 Items Purchased 1,000 3,000 4,000 Cost per Item $75 $80 $82 The inventory balance as of the beginning of the year was $35,000 (500 units at $70 each). During the year ended December 31, the company sold 6,000 units for $150 per unit. Operating expenses other than cost of goods sold totaled $125,000. The effective income tax rate is 30 percent. REQUIRED a. Prepare three income statements, one under each assumption-FIFO, LIFO, average b. How many tax dollars would be saved by using LIFO instead of FIFO? c. Assume the market value of an item of inventory dropped to $78 as of the end of the year. Apply the lower-of-cost-or-market rule, and provide the appropriate journal entry (if necessary) under the FIFO LIFO, and average assumptions Repeat (a) above, assuming the costs per item were the following d. Beginning inventory February 10 May 15 October 20 $80 $78 $77 $75 Which of the three assumptions now gives rise to the highest net income and ending inventory?

Explanation / Answer

Dear Student

(a)

(b)

(c)

Note : The cost of Closing Stock is taken from the Income Statements prepared above.

(d)

Using LIFO method gives rise to highest net income and Closing Inventory.

Regards

Income Statement under FIFO method Particulars Amount ($) Income Sales (600 x 150)                 900,000 Closing Stock : Goods Purchased on Oct 20 (2,500 x 82)                 205,000 Total Income (A)              1,105,000 Expenses Cost of Goods sold : Opening Inventory (500 x 70)                    35,000 Sold Goods purchased on Feb 10 (1,000 x 75)                    75,000 Sold Goods purchased on May 15 (3,000 x 80)                 240,000 Sold Goods purchased on Oct 20 (1,500 x 82)                 123,000 Other Operating Expenses                 125,000 Total Expenses (B)                 598,000 Profit before Tax (A) - (B)                 507,000 Less : Tax @ 30%                 152,100 Profit after Tax                 354,900

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