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Taylor Corporation reports inventory and cost of goods sold based on calculations from a LIFO periodic inventory system.

Taylor Corporation reports inventory and cost of goods sold based on calculations from a LIFO periodic inventory system. The company’s records under this system reveal the following inventory layers at the beginning of 2021 (listed in chronological order of acquisition): 

10,000 units @ $15..........................$150,000 

15,000 units @ $20............................300,000 

Beginning inventory........................$450,000 

During 2021, 30,000 units were purchased for $25 per unit. Due to unexpected demand for the company’s product, 2021 sales totaled 40,000 units at various prices, leaving 15,000 units in ending inventory. 

 

Required: 

1. Calculate the amount to report for cost of goods sold for 2021. 

2. Determine the amount of LIFO liquidation profit that the company must report in a disclosure note to its 2021 financial statements. Assume an income tax rate of 25%. 

3. If the company decided to purchase an additional 10,000 units at $25 per unit at the end of the year, how much income tax currently payable would be saved?

Solutions

Expert Solution

1. Cost of goods sold for 2021
   
Latest purchase 30000*25 $750000
Previous purchase 10000*20 $200000
Cost of goods sold $950000

 

2. Unit Included in cost of goods sold are 9,000 units from beginning inventory purchased at $20 that have now been liquidated.
If the company had purchased at least 40,000 units, no liquidation would have occurred. Then cost of goods sold would have been = 40,000 units * $25 per unit = $ 1,000,000 instead of$ 950,000.
The difference between these two cost of goods sold = $1000000 - 950,000 = $50000 which is the before tax LIFO liquidation profit.
net effect of the liquidation is to increase net income =50,000*(1-0.25%) = $37500

               

3. If the company decided to purchase an additional 10,000 units at $25 per unit at the end of the year,
Income tax currently payable would be saved =10000*(25-20)*25% = $12500
1. Cost of goods sold for 2021
   
Latest purchase 30000*25 $750000
Previous purchase 10000*20 $200000

Junaid answered 2 years ago
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