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):

18,000 units @ $10 $ 180,000
23,000 units @ $15 345,000
Beginning inventory $ 525,000

During 2021, 46,000 units were purchased for $20 per unit. Due to unexpected demand for the company's product, 2021 sales totaled 56,000 units at various prices, leaving 31,000 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 $20 per unit at the end of the year, how much income tax currently payable would be saved?Cost of goods sold |2. LIFO liquidation profit 3 Income tax payable

Answer 1

1. $1,070,000

2. Selling price x 10,000 - (10,000 units x 15 per unit)

3.1$12,500

3.2 zero

3.3 Total Sales - $1,120,000 x 25%

Step-by-step explanation:

1. Cost of goods sold for 2021

46,000 @ $ 20 = $920,000

10,000 @ $15 = $150,000

total = $1,070,000

2.LIFO liquidation profit happens when sales of the period exceeds the total purchases. Thus, in this problem, selling price is not stated so let’s just present how will it be computed.

That is, Selling price x 10,000 - (10,000 x $15)

3.1

10,000 x $20 = 200,000 - (10,000 x $15) = $50,000 x 25% tax rate = $12,500

* there will be an increase of $50,000 if the company decides to purchase an additional 10,000 due to price variation.

3.2

There will be no liquidation profit if the company purchases an additional 10,000 units because sold units equates the purchased units.

3.3 First, let’s just compute the cost of goods sold if the company purchases an additional of 10,000 units.

46,000 @ 20 = $920,000

10,000 @ 20 = $ 200,000

total COGS $1,120,000

So, total sales (selling price is unknown) less $1,120,000 x 25 %is the new income tax payable.