Question

Johnson Corporation began the year with inventory of 30,000 units of its only product. The units cost $8 each. The company uses a perpetual inventory system and the FIFO cost method. The following transactions occurred during the year:

1. Purchased 150,000 additional units at a cost of $10 per unit. Terms of the purchases were 1/10, 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 $0.40 per unit were paid by Johnson.
2. 3,000 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $0.40 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 145,000 units at $16 per unit.
4. On December 28, Johnson purchased 7,000 additional units at $10 each. The goods were shipped f.o.b. destination and arrived at Johnson’s warehouse on January 4 of the following year.
5. 32,000 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 $190,000, 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 $19,000.

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 $190,000.

Answer 1

1.

Beginning inventory	0
2018 Purchases	329600
Ending inventory	329600

Purchases	320000	[32000*10 ]
Freight in	12800	[32000*0.4]
Less: Purchase discounts	3200	[32000*10*1%]
2018 purchases	329600

2

Beginning Inventory		240000
Net purchases:
Purchases	1500000
Freight in [150,000*0.4]	60000
Purchase discounts [(1,500,000-3000 *10)* 1%]	-14700
Returns [3000*10.4]	-31200	1514100
Cost of goods available for sale		1754100
Less: Ending inventory		329600
Cost of goods sold		1424500

Sales	2320000
Less: Cost of goods sold	1424500
Operating expenses	190000
Income before income taxes	705500

3.

Account Titles	Debit	Credit
Cost of Goods Sold	50000
LIFO Reserve		50000

Ending inventory under LIFO
Beginning inventory	240000
2018 Purchases	20600	[2000*10*99%+(2000*0.4)]
Ending inventory	260600
Difference in FIFO and LIFO = 329600 - 260600 = 70000	69000
LIFO reserve = 69,000 -19000 = 50000

4.

Beginning Inventory		240000
Net purchases:
Purchases	1500000
Freight in [150,000*0.4]	60000
Purchase discounts [(1,500,000-3000 *10)* 1%]	-14700
Returns [3000*10.4]	-31200	1514100
Cost of goods available for sale		1754100
Less: Ending inventory		260600
Cost of goods sold		1493500

Sales	2320000
Less: Cost of goods sold	1493500
Operating expenses	190000
Income before income taxes	636500