Question

Laker Company reported the following January purchases and sales data for its only product. Date Activities Units Acquired at Cost Units sold at Retail Jan. 1 Beginning inventory 230 units @ $ 15.50 = $ 3,565 Jan. 10 Sales 180 units @ $ 24.50 Jan. 20 Purchase 190 units @ $ 14.50 = 2,755 Jan. 25 Sales 220 units @ $ 24.50 Jan. 30 Purchase 360 units @ $ 14.00 = 5,040 Totals 780 units $ 11,360 400 units The Company uses a perpetual inventory system. For specific identification, ending inventory consists of 380 units, where 360 are from the January 30 purchase, 5 are from the January 20 purchase, and 15 are from beginning inventory. Exercise 5-4 Perpetual: Income effects of inventory methods LO A1 Required: 1. Complete comparative income statements for the month of January for Laker Company for the four inventory methods. Assume expenses are $2,150, and that the applicable income tax rate is 40%. (Round your Intermediate calculations to 2 decimal places.) 2. Which method yields the highest net income?

Answer 1

Solution 1:

Computation of ending inventory COGS under FIFO
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	230	$15.50	$3,565.00	0	$0.00	$0.00	0	$0.00	$0.00	230	$15.50	$3,565.00
10-Jan	230	$15.50	$3,565.00	0	$0.00	$0.00	180	$15.50	$2,790.00	50	$15.50	$775.00
20-Jan	50	$15.50	$775.00	190	$14.50	$2,755.00	0	$0.00	$0.00	50	$15.50	$775.00
										190	$14.50	$2,755.00
25-Jan	50	$15.50	$775.00	0	$0.00	$0.00	50	$15.50	$775.00	20	$14.50	$290.00
	190	$14.50	$2,755.00				170	$14.50	$2,465.00
30-Jan	20	$14.50	$290.00	360	$14.00	$5,040.00	0	$0.00	$0.00	20	$14.50	$290.00
										360	$14.00	$5,040.00
Total							400		$6,030.00	380		$5,330.00

Computation of ending inventory COGS under LIFO
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	230	$15.50	$3,565.00	0	$0.00	$0.00	0	$0.00	$0.00	230	$15.50	$3,565.00
10-Jan	230	$15.50	$3,565.00	0	$0.00	$0.00	180	$15.50	$2,790.00	50	$15.50	$775.00
20-Jan	50	$15.50	$775.00	190	$14.50	$2,755.00	0	$0.00	$0.00	50	$15.50	$775.00
										190	$14.50	$2,755.00
25-Jan	50	$15.50	$775.00	0	$0.00	$0.00	190	$14.50	$2,755.00	20	$15.50	$310.00
	190	$14.50	$2,755.00				30	$15.50	$465.00
30-Jan	20	$15.50	$310.00	360	$14.00	$5,040.00	0	$0.00	$0.00	20	$15.50	$310.00
										360	$14.00	$5,040.00
Total							400		$6,010.00	380		$5,350.00

Computation of ending inventory COGS under Weighted Average Cost
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	230	$15.50	$3,565	0	$0.00	$0	0	$0.00	$0	230	$15.50	$3,565
10-Jan	230	$15.50	$3,565	0	$0.00	$0	180	$15.50	$2,790	50	$15.50	$775
20-Jan	50	$15.50	$775	190	$14.50	$2,755	0	$0.00	$0	240	$14.71	$3,530
25-Jan	240	$14.71	$3,530	0	$0.00	$0	220	$14.71	$3,236	20	$14.71	$294
30-Jan	20	$14.71	$294	360	$14.00	$5,040	0	$0.00	$0	380	$14.04	$5,334
Total							400		$6,026	380		$5,334

Computation of ending inventory COGS under Specific Identification
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	230	$15.50	$3,565	0	$0.00	$0.00	0	$0.00	$0.00	230	$15.50	$3,565.00
10-Jan	230	$15.50	$3,565	0	$0.00	$0.00	180	$15.50	$2,790.00	50	$15.50	$775.00
20-Jan	50	$15.50	$775.00	190	$14.50	$2,755.00	0	$0.00	$0.00	50	$15.50	$775.00
										190	$14.50	$2,755.00
25-Jan	50	$15.50	$775.00	0	$0.00	$0.00	35	$15.50	$542.50	15	$15.50	$232.50
	190	$14.50	$2,755.00				185	$14.50	$2,682.50	5	$14.50	$72.50
30-Jan	15	$15.50	$232.50	360	$14.00	$5,040.00	0	$0.00	$0.00	15	$15.50	$232.50
	5	$14.50	$72.50							5	$14.50	$72.50
										360	$14.00	$5,040.00
Total							400		$6,015.00	380		$5,345.00

Income Statement - Laker Company
Particulars	Specific Identification	Weighted Average	FIFO	LIFO
Sales	$9,800	$9,800	$9,800	$9,800
Cost of goods sold	$6,015	$6,026	$6,030	$6,010
Gross Profit (Sales - COGS)	$3,785	$3,774	$3,770	$3,790
Expenses	$2,150	$2,150	$2,150	$2,150
Income before income taxes	$1,635	$1,624	$1,620	$1,640
Income tax expense (40%)	$654	$650	$648	$656
Net Income	$981	$975	$972	$984

Solution 2:

LIFO methods yields the highest net income.