Exercise 5-7B: Effect of FIFO versus LIFO on Income Tax Expense

Accounting for Inventories

Exercise 5-7B: Effect of FIFO versus LIFO on Income Tax Expense

Home Gifts Inc. had cash sales of $112,500 for Year 1, its first year of operation. On April 2, the company purchased 150 units of inventory at $180 per unit. On September 1, an additional 200 units were purchased for $200 per unit. The company had 50 units on hand at the end of the year. The company’s income tax rate is 40 percent. All transactions are cash transactions.

Required
a. The preceding paragraph describes five accounting events: (1) a sales transaction, (2) the first purchase of inventory, (3) a second purchase of inventory, (4) the recognition of cost of goods sold expense, and (5) the payment of income tax expense. Show the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow.
b. Compute net income using FIFO.
c. Compute net income using LIFO.
d. Explain the difference, if any, in the amount of income tax expense incurred using the two cost flow assumptions.
e. How does the use of the FIFO versus the LIFO cost flow assumptions affect the statement of cash flows?

Exercise 5-8B: Recording Inventory Transactions Using the Perpetual System: Intermittent Sales and Purchases

The following inventory transactions apply to Duncan Steel Company for Year 2:
Jan. 1 Purchased 200 units @ $12
Apr. 1 Sold 150 units @ $20
Aug. 1 Purchased 300 units @ $15
Dec. 1 Sold 450 units @ $25

The beginning inventory consisted of 180 units at $10 per unit. All transactions are cash transactions.

Required
a. Record these transactions in general journal format assuming Duncan Steel Company uses the FIFO cost flow assumption and keeps perpetual records.
b. Compute the ending balance in the Inventory account.

Exercise 5-9B: Effect of Cost Flow on Ending Inventory: Intermittent Sales and Purchases

Nash Auto Parts, Inc. had the following transactions for Year 2:

Required
a. Determine the quantity and dollar amount of inventory at the end of the year, assuming Nash Auto Parts, Inc. uses the FIFO cost flow assumption and keeps perpetual records.
b. Write a memo explaining why Nash Auto Parts, Inc. would have difficulty applying the LIFO method on a perpetual basis. Include a discussion of how to overcome these difficulties.

Exercise 5-10B: Lower-of-Cost-or-Market Rule: Perpetual System

The following information pertains to James Hardware’s ending inventory for the current year:

Required
a. Determine the value of the ending inventory using the lower-of-cost-or-market rule applied to (1) each individual inventory item and (2) the inventory in aggregate.
b. Prepare any necessary journal entries, assuming the decline in value is immaterial, using the (1) individual method and (2) aggregate method. James Hardware uses the perpetual inventory system.

Exercise 5-11B: Lower-of-Cost-or-Market Rule

Harvey Company carries three inventory items. The following information pertains to the ending inventory:

Required
a. Determine the ending inventory that will be reported on the balance sheet, assuming that Harvey applies the lower-of-cost-or-market rule to individual inventory items.
b. Prepare the necessary journal entry, assuming the decline in value is immaterial.