Question

Cansela Corporation uses a periodic inventory system and the LIFO method to value its inventory. The company began 2018 with inventory of 6,100 units of its only product. The beginning inventory balance of $87,200 consisted of the following layers: 2,600 units at $12 per unit = $ 31,200 3,500 units at $16 per unit = 56,000 Beginning inventory $ 87,200 During the three years 2018–2020, the cost of inventory remained constant at $18 per unit. Unit purchases and sales during these years were as follows: Purchases Sales 2018 19,000 20,000 2019 25,000 27,500 2020 21,000 22,000 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 30%.

Answer 1

1.

Year	Cost of goods sold
		2018	358000
2019	490000
2020	390000

Working:

2018
	Units	Price	Value
Beginning Inventory
	2600	12	31200
	3500	16	56000
	6100		87200
Purchases	19000	18	342000
Goods available for sale	25100		429200
Sales
	19000	18	342000
	1000	16	16000
Cost of goods sold	20000		358000
Ending Inventory	5100		71200
2019
Beginning Inventory
	2600	12	31200
	2500	16	40000
	5100		71200
Purchases	25000	18	450000
Goods available for sale	30100		521200
Sales
	25000	18	450000
	2500	16	40000
Cost of goods sold	27500		490000
Ending Inventory	2600		31200
2020
Beginning Inventory
	2600	12	31200
	0	16	0
	2600		31200
Purchases	21000	18	378000
Goods available for sale	23600		409200
Sales
	21000	18	378000
	1000	12	12000
Cost of goods sold	22000		390000
Ending Inventory	1600		19200

2.  

Year	Liquidation profit
		2018	2000
2019	5000
2020	4000

Working:

2018
Liquidation profit = (Current cost per unit - old cost per unit) x number of units
= (18.00-16.00) x 1000 = 2,000
2019
Liquidation profit = (Current cost per unit - old cost per unit) x number of units
= (18.00-16.00) x 2500 = 5,000
2020
Liquidation profit = (Current cost per unit - old cost per unit) x number of units
= (18.00-12.00) x 1000 = 4,000

3.