Taylor Corporation has used a periodic inventory system and the LIFO cost method

Question

Taylor Corporation has used a periodic inventory system and the LIFO cost method since its inception in 2011. The company began 2018 with the following inventory layers (listed in chronological order of acquisition):

During 2018, 30,000 units were purchased for $25 per unit. Due to unexpected demand for the company's product, 2018 sales totaled 40,000 units at various prices, leaving 15,000 units in ending inventory.

Required:
1. Calculate cost of goods sold for 2018.
2. Determine the amount of LIFO liquidation profit that the company must report in a disclosure note to its 2018 financial statements. Assume an income tax rate of 40%.
3. If the company decided to purchase an additional 10,000 units at $25 per unit at the end of the year, how much income tax currently payable would be saved?

Explanation / Answer

Solution: 1. Cost of goods sold for 2018 = $950,000 Working Notes: Computation cost of goods sold for 2018 Beginning inventory $450,000 Add: Purchases 750,000 [30,000 units x $25 per unit ] Cost of goods available for sale $1,200,000 Less: Ending inventory $250,000 [ see below calculation] Cost of goods sold for 2018 $950,000 Computation of ending inventory for 2018 Inventory left Beginning inventory 10,000 units @ $15 150,000 Beginning inventory 5,000 units @ $20 100,000 Ending inventory 250,000 Under LIFO , last-in, first-out , 40,000 are sold out of which 30,000 purchased units is will be used then out of beginning inventory the latest inventory of 15,000 @20 , 10,000 units will be used and left inventory will be closing inventory 2. LIFO liquidation profit $30,000 Working Notes: LIFO liquidation profit is the profit is made due to lower cost of goods sold due to lower price of old inventory. Assuming all the units sold are purchased at current price of inventory @25 per unit 1,000,000 [40,000 x 25 ] Less: Cost of goods sold 950,000 [calculated above] LIFO liquidation profit before tax 50,000 Less: Tax @ 40% 20,000 [50,000 x 40%] LIFO liquidation profit 30,000 3. Income tax currently payable would be saved = $20,000 Working Notes: If it has purchased additional 10,000 units @$25 under LIFO Cost of goods sold would have been = 30,000 x 25 + 10,000 x 25 =1,000,000 Since , cost will increased from $950,000 - $1,000,000 Income will fall by $50,000 and tax payable on this $50,000 will be saved that is $50,000x40% = $20,000 Please feel free to ask if anything about above solution in comment section of the question.

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