Question

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?

Answer 1

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