LIFO Liquidation Profit Hammond Company adopted LIFO when it was formed on January 1, 2017. Since then, the company has had the following purchases and sales of its single inventory item:
In December 2020, the controller realized that because of an unexpected increase in demand, the company had sold 22,000 units but had purchased only 19,000 units during the year. In 2020, each unit had been sold for $19, and each unit purchased had cost $10. The income tax rate is 21%.
Required:
1.
Ascertain the LIFO liquidation profit to be reported by Company H if no further purchases are made.
Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consists the initial cost for the remaining unsold items.
Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.
Calculate the ending inventory as per FIFO:
The ending inventory as per FIFO is $48,000
Calculate the ending inventory as per LIFO:
Particulars | Amount ($) |
2,000 units at $5 per unit | $ 10,000 |
3,000 units at $6 per unit | $ 18,000 |
1,000 units at $8 per unit | $ 8,000 |
Ending inventory | $ 36,000 |
Table (1)
Compute the LIFO Liquidation units:
2.
Prepare the disclosure annual report for 2020.
3.
Ascertain the tax savings which can be made by an additional purchase for $7,000.
4.
Ascertain the tax savings which can be made by an additional purchase for $7,000, over a period of 4 years.
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