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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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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:

Chapter 7, Problem 9P, LIFO Liquidation Profit Hammond Company adopted LIFO when it was formed on January 1, 2017. Since

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. 1. Next Level If Hammond makes no additional purchases in 2020, how much LIFO liquidation profit will it report?
  2. 2. Prepare the appropriate annual report disclosures for 2020.
  3. 3. Next Level if Hammond purchases an additional 7,000 units in December 2020, how much income tax will the company save?
  4. 4. Next Level If Hammond purchases the additional 7,000 units, how much income tax has the company saved over the 4-year period by using LIFO instead of the FIFO cost flow assumption?

1.

To determine

Ascertain the LIFO liquidation profit to be reported by Company H if no further purchases are made.

Explanation

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 (6,000 units ×$8).

Calculate the ending inventory as per LIFO:

ParticularsAmount ($)
2,000 units at $5 per unit (2,000×$5)$ 10,000
3,000 units at $6 per unit (3,000×$6)$ 18,000
1,000 units at $8 per unit (1,000×$8)$ 8,000
Ending inventory$ 36,000

Table (1)

Compute the LIFO Liquidation units:

LIFO Liquidation units = Units Sold 

2.

To determine

Prepare the disclosure annual report for 2020.

3.

To determine

Ascertain the tax savings which can be made by an additional purchase for $7,000.

4.

To determine

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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