Assume that the market value of an inventory item dropped to $1.35 as of year-end. Apply the lower-of-cost-or market (net realizable value) rule, and provide the appropriate journal entry (if necessary) under the FIFO, average, and LIFO assumptions.
Assume that the market value of an inventory item dropped to $1.35 as of year-end. Apply the lower-of-cost-or market (net realizable value) rule, and provide the appropriate journal entry (if necessary) under the FIFO, average, and LIFO assumptions.
Century 21 Accounting General Journal
11th Edition
ISBN:9781337680059
Author:Gilbertson
Publisher:Gilbertson
Chapter20: Accounting For Inventory
Section: Chapter Questions
Problem 3AP
Related questions
Question
The purchase schedule for Lumbermans and Associates is as follows:
Date | Items Purchased | Cost per Item |
March 15 | 6,000 | $1.30 |
July 30 | 9,000 | 1.50 |
December 17 | 7,000 | 1.60 |
Total | 22,000 |
The inventory balance as of the beginning of the year was $15,000 (15,000 units at $1), and an inventory count at year-end indicated that 11,000 items were on hand. Sales and operating expenses (excluding cost of goods sold) totaled $55,000 and $15,000, respectively. The federal income tax is 30 percent of taxable income.
INSTRUCTIONS:
- Prepare three income statements, one under each of the assumptions: FIFO, average, and LIFO.
- How many tax dollars would be saved by using LIFO instead of FIFO?
- Assume that the market value of an inventory item dropped to $1.35 as of year-end. Apply the lower-of-cost-or market (net realizable value) rule, and provide the appropriate
journal entry (if necessary) under the FIFO, average, and LIFO assumptions. - Repeat (a) above assuming that the costs per item were as follows:
Beginning inventory | $1.60 |
March 15 | 1.40 |
July 30 | 1.30 |
December 17 | 1.20 |
Which of the three assumptions gives rise to the highest net income and ending inventory amounts now? Why?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 5 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Financial Accounting: The Impact on Decision Make…
Accounting
ISBN:
9781305654174
Author:
Gary A. Porter, Curtis L. Norton
Publisher:
Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
Financial Accounting: The Impact on Decision Make…
Accounting
ISBN:
9781305654174
Author:
Gary A. Porter, Curtis L. Norton
Publisher:
Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
Individual Income Taxes
Accounting
ISBN:
9780357109731
Author:
Hoffman
Publisher:
CENGAGE LEARNING - CONSIGNMENT