Question

The Churchill Corporation uses a periodic inventory system and the LIFO inventory cost method for its one product. Beginning inventory of 21,600 units consisted of the following, listed in chronological order of acquisition:

12,800 units at a cost of $8.00 per unit = $102,400
8,800 units at a cost of $9.00 per unit = 79,200
During 2021, inventory quantity declined by 11,600 units. All units purchased during 2021 cost $12.00 per unit.
Required: Calculate the before-tax LIFO liquidation profit or loss that the company would report in a disclosure note, assuming the amount determined is material.

Answer 1

The question revolves around calculating the before-tax LIFO liquidation profit or loss for the Churchill Corporation using a periodic inventory system when inventory quantity declines. The calculation requires a comparison between the historical costs of units and their liquidation cost under the LIFO method.

Step-by-step explanation:

The subject of this question pertains to accounting principles specifically dealing with inventory accounting and profit calculation using the LIFO (Last-In, First-Out) method under a periodic inventory system. In this scenario, the Churchill Corporation is experiencing a LIFO liquidation as the quantity of inventory has declined, and thus may be required to report a before-tax LIFO liquidation profit or loss.

To calculate the LIFO liquidation profit or loss, we must compare the cost at which the units were originally recorded with the cost at which they are being liquidated. Under LIFO, the most recently purchased items are considered sold first. According to the given information, during 2021, the company sold 11,600 units which were last purchased at a cost of $12.00 per unit. The liquidation will go into the older layers of inventory, which have lower costs per unit.

As the beginning inventory consisted of 8,800 units at $9.00 per unit and 12,800 units at $8.00 per unit, the units sold during the liquidation would first deplete the $9.00 per unit inventory followed by the $8.00 unit inventory. The calculation for the LIFO liquidation profit or loss involves the difference between the historical cost of units and the cost at which the inventory is liquidated.