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):

15,000 units @ $10	$	150,000
20,000 units @ $15		300,000
Beginning inventory	$	450,000

During 2018, 40,000 units were purchased for $20 per unit. Due to unexpected demand for the company's product, 2018 sales totaled 49,000 units at various prices, leaving 26,000 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 9,000 units at $20 per unit at the end of the year, how much income tax currently payable would be saved?
  

Answer 1

Ans-1 - Computation of cost of goods sold for 2018:

Cost of Goods Sold
Beginning Inventory		$450,000
Add:Purchases	40,000units @$20	$800,000
Cost of goods available for sale		$1,250,000
Less: Ending Inventory		-$315,000
Cost of Goods Sold		$935,000

Working Note:

Calculation of ending inventory is given below:

	Ending inventory
	Purchases:
	Units	Unit Cost	Total
	15,000	$10.00	$150,000
	11,000	$15.00	$165,000
Total	26,000		$315,000

Ans- Computation of LIFO liquidation profit:

LIFO liquidation profit
Sales (49,000units @ $20)	$980,000
Less: LIFO cost of goods sold	-$935,000
LIFO liquidation profit before taxes	$45,000
Less: Taxes ($45,000*40%)	-$18,000
LIFO liquidation profit	$27,000

Therefore, LIFO liquidation profit is $27,000.

Ans-3- If the company decided to purchase an additional 9,000 units at $20 per unit at the end of the year then the income tax would be reduced by 40% on profit:

Profit Before Tax= $45,000

Tax=40%

Total income tax=$45,000*40%= $18,000

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