Question

Required information

Use the following information for the Exercises below.

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Laker Company reported the following January purchases and sales data for its only product.

Date			Activities	Units Acquired at Cost								Units sold at Retail
Jan.	1		Beginning inventory	225	units	@	$	15.00	=	$	3,375
Jan.	10		Sales										175	units	@	$	24.00
Jan.	20		Purchase	180	units	@	$	14.00	=		2,520
Jan.	25		Sales										210	units	@	$	24.00
Jan.	30		Purchase	350	units	@	$	13.50	=		4,725
			Totals	755	units					$	10,620		385	units

The Company uses a perpetual inventory system. For specific identification, ending inventory consists of 370 units, where 350 are from the January 30 purchase, 5 are from the January 20 purchase, and 15 are from beginning inventory.

Exercise 5-4 Perpetual: Income effects of inventory methods LO A1

Required:

1. Complete comparative income statements for the month of January for Laker Company for the four inventory methods. Assume expenses are $2,100, and that the applicable income tax rate is 40%. (Round your Intermediate calculations to 2 decimal places.)

2. Which method yields the highest net income?

• Weighted average

• FIFO

• Specific identification

• LIFO

3. Does net income using weighted average fall between that using FIFO and LIFO?

• No

• Yes

4. If costs were rising instead of falling, which method would yield the highest net income?

• LIFO

• FIFO

• Weighted average

• Specific identification

Answer 1

1.

Income Statement - Laker Company
Particulars	Specific Identification	Weighted Average	FIFO	LIFO
Sales	$9,240	$9,240	$9,240	$9,240
Cost of goods sold	$5,600	$5,611	$5,615	$5,595
Gross Profit (Sales - COGS)	$3,640	$3,629	$3,625	$3,645
Expenses	$2,100	$2,100	$2,100	$2,100
Income before income taxes	$1,540	$1,529	$1,525	$1,545
Income tax expense (40%)	$616	$612	$610	$618
Net Income	$924	$917	$915	$927

2.

LIFO

3.

Yes

4

FIFO

Working notes: