Question

Cansela Corporation uses a periodic inventory system and the LIFO method to value its inventory. The company began 2018 with inventory of 5,600 units of its only product. The beginning inventory balance of $75,600 consisted of the following layers:
  

2,100 units at $11 per unit	=	$	23,100
3,500 units at $15 per unit	=		52,500
Beginning inventory		$	75,600

  
During the three years 2018–2020, the cost of inventory remained constant at $17 per unit. Unit purchases and sales during these years were as follows:
  

	Purchases	Sales
2018	11,500	13,000
2019	15,000	17,000
2020	13,500	14,700

  
Required:
1. Calculate cost of goods sold for 2018, 2019, and 2020.
2. Disregarding income tax, determine the LIFO liquidation profit or loss, if any, for each of the three years.
3. Determine the effects of LIFO liquidation on cost of goods sold and net income for 2018, 2019, and 2020. Cansela’s effective income tax rate is 35%.

Answer 1

1) Calculation of cost of goods sold for 2018,2019 and 2020
2018
	Particulars			Amount($)
	Purchases - sales (11500-13000)			$     22,500.00
	1500*15
	Purchases (11500*17)			$    195,500.00
	Cost of goods sold			$ 218,000.00
2019
	Particulars			Amount($)
	Purchases - sales (15000-17000)			$     30,000.00
	2000*15
	Purchases (15000*17)			$    255,000.00
	Cost of goods sold			$ 285,000.00
2020
	Particulars			Amount($)
	Purchases - sales (13500-14700)			$     13,200.00
	1200*11
	Purchases (13500*17)			$    229,500.00
	Cost of goods sold			$ 242,700.00
2. Disregarding income tax, determine the LIFO liquidation profit or loss, if any, for each of the three years
Year	Calculation	Amount
2018	1500*(17-15)	$ 3,000.00
2019	2000*(17-15)	$ 4,000.00
2020	1200*(17-11)	$ 7,200.00
3) Explaination ;
During fiscal 2018,2019 and 2020 inventory quantities in certain LIFo layers were reduced.
These reductions resulted in a liqudation of LIFO inventory quantities carried at lower costs.
Prevailing in prior years as compared with cost of fiscal 2018,2019 and 2020 purchases
Cost of goods sold				Net income
2018	Decrease	by	3000	Increases	by	1950
2019	Decrease	by	4000	Increases	by	2600
2020	Decrease	by	7200	Increases	by	4680
Explaination :
Cost of goods sold				Net income
2018	Decrease	by	3000	Increases	by	D58*65%
2019	Decrease	by	4000	Increases	by	D59*65%
2020	Decrease	by	7200	Increases	by	D60*65%
					After tax income