Chapter 7 Problem 56P Bookmarlk Show all steps ON Problem Co

Chapter 7, Problem 56P Bookmarlk Show all steps ON Problem Contractor Supply Company is a wholesaler for commercial builders. The company uses a periodic inventory system. The data concerning Kemtone cooktops for the year 20X8 follow: Units Purchases Units Sol Balance December 31. 20X7 February 10, 20X8 April 14 May 9 July 14 October 21 November 12 Total December 31, 20X8 110$50- $5,500 80 $60 4.800 60 120S70 S 8.400 120 100$80$8,000 80 260 300 $21,200 150@? The sales during 20X8 were made at the following selling prices: 60 units905,400 120 units100 12.000 80 units 1108,800 $26.200 260 1. Prepare a comparative statement of gross profit for the year ended December 31, 20X8, using FIFO, LIFO, and average cost inventory methods. Remember that when average cost is used with the periodic inventory system we refer to it as the weighted-average method 2. By how much would income taxes differ if Contractor Supply Company had used LIFO instead of FIFO for Kemtone cooktops? Assume a 40% income tax rate

Solution

Answers

FIFO

Cost of Goods available for sale

Cost of Goods Sold

Ending Inventory

Units

Cost/unit

COG for sale

Units sold

Cost/unit

COGS

Units

Cost/unit

Ending inventory

Beginning Inventory

110

$    50.00

$    5,500.00

100

$    50.00

$       5,000.00

10

$    50.00

$         500.00

Purchases:

10-Feb

80

$    60.00

$    4,800.00

80

$    60.00

$       4,800.00

0

$    60.00

$                   -  

09-May

120

$    70.00

$    8,400.00

80

$    70.00

$       5,600.00

40

$    70.00

$      2,800.00

21-Oct

100

$    80.00

$    8,000.00

$    80.00

$                    -  

100

$    80.00

$      8,000.00

TOTAL

410

$ 26,700.00

260

$    15,400.00

150

$   11,300.00

LIFO

Cost of Goods available for sale

Cost of Goods Sold

Ending Inventory

Units

Cost/unit

COG for sale

Units sold

Cost/unit

COGS

Units

Cost/unit

Ending inventory

Beginning Inventory

110

$    50.00

$    5,500.00

0

$    50.00

$                    -  

110

$    50.00

$      5,500.00

Purchases:

10-Feb

80

$    60.00

$    4,800.00

40

$    60.00

$       2,400.00

40

$    60.00

$      2,400.00

09-May

120

$    70.00

$    8,400.00

120

$    70.00

$       8,400.00

0

$    70.00

$                   -  

21-Oct

100

$    80.00

$    8,000.00

100

$    80.00

$       8,000.00

0

$    80.00

$                   -  

TOTAL

410

$ 26,700.00

260

$    18,800.00

150

$      7,900.00

Average Method

Cost of Goods available for sale

Cost of Goods Sold

Ending Inventory

Units

Cost/unit

COG for sale

Units sold

Cost/unit

COGS

Units

Cost/unit

Ending inventory

Beginning Inventory

110

$    50.00

$    5,500.00

Purchases:

10-Feb

80

$    60.00

$    4,800.00

09-May

120

$    70.00

$    8,400.00

21-Oct

100

$    80.00

$    8,000.00

TOTAL

410

65.12

$ 26,700.00

150

65.12

$       9,768.00

260

$    65.12

$   16,931.20

FIFO

LIFO

Weighted Average Method

Sales Revenue

$ 26,200.00

$ 26,200.00

$ 26,200.00

(-) Cost of Goods Sold (as calculated above)

$ 15,400.00

$ 18,800.00

$    9,768.00

Gross Margin

$ 10,800.00

$    7,400.00

$ 16,432.00

FIFO

LIFO

Difference

Sales Revenue

$ 26,200.00

$ 26,200.00

$                 -  

(-) Cost of Goods Sold (as calculated above)

$ 15,400.00

$ 18,800.00

$ (3,400.00)

Gross Margin

$ 10,800.00

$    7,400.00

$    3,400.00

Income Taxes

$    4,320.00

$    2,960.00

$    1,360.00

---Hence, If LIFO has been used instead of FIFO, the cost of goods sold would have been more by $3,400, and as a result, gross profits would have been lower by the same amount resulting in lower net income.

The income tax expenses under LIFO would have been $ 1,360 LOWER than what they have been if FIFO method was being used.

FIFO	Cost of Goods available for sale	Cost of Goods Sold	Ending Inventory
	Units	Cost/unit	COG for sale	Units sold	Cost/unit	COGS	Units	Cost/unit	Ending inventory
Beginning Inventory	110	$    50.00	$    5,500.00	100	$    50.00	$       5,000.00	10	$    50.00	$         500.00
Purchases:
10-Feb	80	$    60.00	$    4,800.00	80	$    60.00	$       4,800.00	0	$    60.00	$                   -
09-May	120	$    70.00	$    8,400.00	80	$    70.00	$       5,600.00	40	$    70.00	$      2,800.00
21-Oct	100	$    80.00	$    8,000.00		$    80.00	$                    -	100	$    80.00	$      8,000.00
TOTAL	410		$ 26,700.00	260		$    15,400.00	150		$   11,300.00
LIFO	Cost of Goods available for sale	Cost of Goods Sold	Ending Inventory
	Units	Cost/unit	COG for sale	Units sold	Cost/unit	COGS	Units	Cost/unit	Ending inventory
Beginning Inventory	110	$    50.00	$    5,500.00	0	$    50.00	$                    -	110	$    50.00	$      5,500.00
Purchases:
10-Feb	80	$    60.00	$    4,800.00	40	$    60.00	$       2,400.00	40	$    60.00	$      2,400.00
09-May	120	$    70.00	$    8,400.00	120	$    70.00	$       8,400.00	0	$    70.00	$                   -
21-Oct	100	$    80.00	$    8,000.00	100	$    80.00	$       8,000.00	0	$    80.00	$                   -
TOTAL	410		$ 26,700.00	260		$    18,800.00	150		$      7,900.00
Average Method	Cost of Goods available for sale	Cost of Goods Sold	Ending Inventory
	Units	Cost/unit	COG for sale	Units sold	Cost/unit	COGS	Units	Cost/unit	Ending inventory
Beginning Inventory	110	$    50.00	$    5,500.00
Purchases:
10-Feb	80	$    60.00	$    4,800.00
09-May	120	$    70.00	$    8,400.00
21-Oct	100	$    80.00	$    8,000.00
TOTAL	410	65.12	$ 26,700.00	150	65.12	$       9,768.00	260	$    65.12	$   16,931.20