Question

Johnson Corporation began the year with inventory of 13,000 units of its only product. The units cost $9 each. The company uses a perpetual inventory system and the FIFO cost method. The following transactions occurred during the year:

1. Purchased 65,000 additional units at a cost of $12 per unit. Terms of the purchases were 3/10, n/30, and 100% of the purchases were paid for within the 10-day discount period. The company uses the gross method to record purchase discounts. The merchandise was purchased f.o.b. shipping point and freight charges of $0.50 per unit were paid by Johnson.
2. 1,300 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $0.50 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.
3. Sales for the year totaled 60,000 units at $19 per unit.
4. On December 28, Johnson purchased 5,300 additional units at $12 each. The goods were shipped f.o.b. destination and arrived at Johnson’s warehouse on January 4 of the following year.
5. 16,700 units were on hand at the end of the year.

Required:

1. Determine ending inventory and cost of goods sold at the end of the year.

2. Assuming that operating expenses other than those indicated in the above transactions amounted to $156,000, determine income before income taxes for the year.

3. For financial reporting purposes, the company uses LIFO (amounts based on a periodic inventory system). Record the year-end adjusting entry for the LIFO reserve, assuming the balance in the LIFO reserve at the beginning of the year is $15,600.

4. Determine the amount the company would report as income before taxes for the year under LIFO. Operating expenses other than those indicated in the above transactions amounted to $156,000

Answer 1

Answer 1

Ending Inventory as per FIFO method:

Under FIFO, Inventory Purchased first is sold first.

Hence, inventroy of 16700 Units are from latest purchase made.

Value of Latest purchase made: ($12-$12*3%)+$0.5=$12.14 per Unit

As purchases made on December 28 were not received at year end it will not be considered in any of the calculations.

Value of ending inventory as per FIFO = $12.14*16,700 units = $202,738

Cost of Goods Sold:

Description	Amount
Beginning Inventory	117,000
13000*9
Add Purchases	780,000
65000*12
Less Purchase Returns	16,250
1300*12.5
Less Purchase Discounts
63700*12*3% (as 1300 units were returned)	22,932
Add Freight
65000*0.5	32,500
	890,318
Less Ending Inventory	202,738
Cost of Goods Sold	687,580

Answer 2

Income before income taxes for the year:

Description	Amount
Sales	$        1,140,000
60000*19
Less Cost of Goods Sold	$            687,580
Less Operating Expenses	$            156,000
Income Before Taxes	$            296,420

Answer 3

Journal entry of LIFO Reverse

Particulars	Debit	Credit
Cost of Goods sold	$ 15,600
LIFO reserve A/c		$ 15,600

Note : LIFO reverse refer excess of FIFO over LIFO cost . Here increase of cost of goods sold as under LIFO most recent items to be sold first. So we debit cost of goods sold and credit LIFO reverse account.

Answer 4

Description	Amount
Sales (60000*19)	$ 1,140,000
Less Cost of Goods Sold
(12.14*60000)	728400
As under LIFO Goods purchased Latest are sold first
Less Operating Exp	156000
Income Before Tax	$     255,600