Question

Johnson Corporation began the year with inventory of 28,000 units of its only product. The units cost $8 each. The company uses a perpetual inventory system and the FIFO cost method. The following transactions occurred during the year:A.Purchased 140,000 additional units at a cost of $10 per unit. Terms of the purchases were 1/10, n/30, and 100% of the purchases were paid for within the 10-day discount period. The company uses the gross method to record purchase discounts. The merchandise was purchased f.o.b. shipping point and freight charges of $0.60 per unit were paid by Johnson.B. 2,800 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $0.60 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.C. Sales for the year totaled 135,000 units at $17 per unit.D. On December 28, Johnson purchased 6,800 additional units at $10 each.E. The goods were shipped f.o.b. destination and arrived at Johnson’s warehouse on January 4 of the following year. 30,200 units were on hand at the end of the year.Required: 1)Determine ending inventory and cost of goods sold at the end of the year. 2)Assuming that operating expenses other than those indicated in the above transactions amounted to $186,000, determine income before income taxes for the year. 3)For financial reporting purposes, the company uses LIFO (amounts based on a periodic inventory system). Record the year-end adjusting entry for the LIFO reserve, assuming the balance in the LIFO reserve at the beginning of the year is $18,600. 4)Determine the amount the company would report as income before taxes for the year under LIFO. Operating expenses other than those indicated in the above transactions amounted to $186,000.

Answer 1

1) Determine ending inventory and cost of goods sold at the end of the year

Ending Inventory = $ 320,120

Cost of Goods sold = $ 1, 358 200

2) Determine income before income taxes for the year - FIFO

Sales (135,000×$17.00) 2,295,000

Less Cost of Goods Sold 1, 358 200

Gross Profit 936,800

Less Operating Expenses 186,000

Net Income Before Tax 750,800

3) Year-end adjusting entry for the LIFO reserve, assuming the balance in the LIFO reserve at the beginning of the year is $18,600

Beginning FIFO Reserve 18,600

Adjastment during the year 228720

Ending FIFO Reserve 247320

4) Determine income before income taxes for the year - LIFO

Sales (135,000×$17.00) 2,295,000

Less Cost of Goods Sold 1, 431,000

Gross Profit 864,000

Less Operating Expenses 186,000

Net Income Before Tax 678,000

Step-by-step explanation:

1) Determine ending inventory and cost of goods sold at the end of the year

Ending Inventory =(30200× $10.60) = $ 320,120

Cost of Goods sold ((28000×$8.00)+(107000×$10.60))= $ 1, 358 200

4) Determine income before income taxes for the year - LIFO

Ending Inventory =(2200× $10.60) +(28000× $8.00) = $ 247320

Cost of Goods sold (135000@$10.60)= $ 1, 431,000