Question

PART 1: The Churchill Corporation uses a periodic inventory system and the LIFO inventory cost method for its one product. Beginning inventory of 24,000 units consisted of the following, listed in chronological order of acquisition:

14,000 units at a cost of $9.00 per unit = $126,000
10,000 units at a cost of $10.00 per unit = 100,000

During 2021, inventory quantity declined by 14,000 units. All units purchased during 2021 cost $13.00 per unit.

Required:
Calculate the before-tax LIFO liquidation profit or loss that the company would report in a disclosure note, assuming the amount determined is material.

PART 2: Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company reports inventory and cost of goods sold based on calculations from a LIFO periodic inventory system. Cast Iron’s December 31, 2021, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition):

Units	Unit Cost
7,000	$	700
5,000		800
8,000		900

The replacement cost of the grills throughout 2022 was $1,000. Cast Iron sold 37,000 grills during 2022. The company's selling price is set at 200% of the current replacement cost.

Required:
1. & 2. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 under two different assumptions. First, that Cast Iron purchased 38,000 units and, second, that Cast Iron purchased 20,000 units during the year.
4. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 assuming that Cast Iron purchased 38,000 units (as per the first assumption) and 20,000 units (as per the second assumption) during the year and uses the FIFO inventory cost method rather than the LIFO method.

Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 under two different assumptions. First, that Cast Iron purchased 38,000 units and, second, that Cast Iron purchased 20,000 units during the year. (Round "Gross profit ratio" answer to 1 decimal place (i.e., 0.123 needs to be entered as 12.3%.))

	Purchased Units Gross Profit Gross Profit Ratio 38,000 % 20,000 %

Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 assuming that Cast Iron purchased 38,000 units (as per the first assumption) and 20,000 units (as per the second assumption) during the year and uses the FIFO inventory cost method rather than the LIFO method. (Round "Gross profit ratio" answer to 1 decimal place (i.e., 0.123 needs to be entered as 12.3%.))

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	Purchased Units Gross Profit Gross Profit Ratio 38,000 % 20,000 %

Answer 1

PART 1:

Calculate the before-tax LIFO liquidation profit or loss that the company would report in a disclosure note, assuming the amount determined is material.

Answer:

Before-tax LIFO liquidation profit

46,000

Calculation:

When the LIFO method is used, the inventory purchased last is sold first. So, here 10,000 units are sold first. The difference between the current costs and actual cost lead to profit.

Then the quantity declined by is 14,000; So, the next inventory unit sold out will be = 14,000 - 10,000 = 4000 and at a cost of $9 from the first purchase.

It has also a profit due to difference between the current costs and actual cost.

The calculation is done below:

Units	Actual Cost	Current cost	Profit per unit	Total Profit
10,000	10	13	3	30,000
4,000	9	13	4	16,000
				46,000

PART 2:

1. & 2. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 under two different assumptions. First, that Cast Iron purchased 38,000 units and, second, that Cast Iron purchased 20,000 units during the year.

Answer:

1.

Gross profit	$37,000,000
Gross profit ratio	50.0%

2.

Gross profit	$40,000,000
Gross profit ratio	54.1%

Calculation:

1.

Here, there are two situation, one with purchase of 38,000 units and other with purchase of 20,000 units.

In the first situation, cast iron purchased 38000 units, and sold 37,000. Since it is LIFO, they sell it from last purchased which is only the 2022 purchase. Hence the cost is 1000 per unit.

The units sold was 37,000. And we need to calculate the sales first, then deduct the cost of goods sold. Deducting cost of goods sold from sales give gross profit.

The sale price is 200% of curent sales price. So, sale price = 1000* 200% = 2,000

Sales (37,000 units × $2,000)	74,000,000
Less: Cost of goods sold (37,000 units × $1,000)	(37,000,000)
Gross profit	37,000,000

Then we need to calculate the gross profit ratio:

Gross profit ratio = $37,000,000 ÷ $74,000,000 = 50%

2.

In the second situation, cast iron purchased 24,000 units in 2022, and sold 37,000. Since it is LIFO, they first sell all of 24,000 from last purchased which coast 1,000. And also, they sell the last yea inventory in LIFO basis. So, first we need to calculate the cost of goods sold as below:

20,000 units ×	1,000	=	20,000,000
8,000units ×	900	=	7,200,000
5,000units ×	800	=	4,000,000
4,000units ×	700	=	2,800,000
37,000 units			34,000,000

Then we need to deduct it from sales, to get the gross profit.

Sales (37,000 units × $2,000)	74,000,000
Less: Cost of goods sold	(34,000,000)
Gross profit	40,000,000

Then we need to calculate the gross profit ratio:

Gross profit ratio = $40,000,000 ÷ $74,000,000 = 54.1%

4. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 assuming that Cast Iron purchased 38,000 units (as per the first assumption) and 20,000 units (as per the second assumption) during the year and uses the FIFO inventory cost method rather than the LIFO method.

Answer:

Purchased Units	Gross Profit	Gross Profit Ratio
38,000	$40,900,000	55.3%
20,000	$40,900,000	55.3%

Calculation:

Here, the method used is FIFO, so first purchased inventory is sold first. Hence, we consider the 2021 inventory first and then for the rest of units that is  

37,000 - 20,000 = 17,000 units

For 17,000 units we need to take from the 2022 purchase.

For 2022 , the two situations of purchase are 38,000 units and 20,000 units. Since the 2022 units required here is only 17,000, the cost of goods sold and gross profit for both the situation is same.

The calculation is done below;

Sales (37,000 units × $2,000)		74,000,000
Cost of goods sold:
7,000 units x 700	4,900,000
5,000 units x 800	4,000,000
8,000 units x 900	7,200,000
17,000 units x 1000	17,000,000	(33,100,000)
Gross Profit		40,900,000

Then we need to calculate the gross profit ratio:

Gross profit ratio = $40,900,000 ÷ $74,000,000 = 55.3%