Question

Cyclone Co. uses the periodic inventory system. The followinginformation about their inventory of Model XX Mountain Bicycles isavailable: please show work
Date Transaction Number of Units Cost per Unit
1/1 Beginning Inventory 50 $800
4/12 Purchase 80 $820
7/8 Purchase 75 $840
9/22 Purchase 90 $850
During the year, 235 bicycles were sold at a price of $1,500each. Other operating costs equaled $80,000 and their tax rateis 30%. Round final answers to the nearest dollar.
a) What was ending inventory and cost of goods sold on 12/31under the FIFO cost flow assumption?
b) What was ending inventory and cost of goods sold on 12/31under the LIFO cost flow assumption?
c) What was ending inventory and cost of goods sold on 12/31under the weighted average cost flow assumption?
d) How much is gross margin under the FIFO method for the yearended 12/31?
e) How much is income tax expense under the LIFO method as of12/31?
f)How much tax is saved using LIFO instead of FIFO costing asof 12/31?

Answer 1

Answer and Explanation:

The computation is shown below;

Cost of goods available for sale

Beg. inventory 50 units at $800 = $40,000

Add:  Purchases 80 units at $820 = $65,600

Add: purchases   75 units at $840 =  $63,000    

Add: purchases 90 units at $850  = $76,500    

Cost of goods available for sale  $245,100

Now

Total number of bicycles is

= 50 + 80 + 75 + 90

= 295

And, Number of bikes sold is 235.

A. FIFO assumption

Cost of goods available for sale $245,100

less: Ending inventory 60 at $850  ($51,000)

Cost of goods sold  $194,100

B.LIFO assumption

Cost of goods available for sale $245,100

Less Ending inventory

(50 units at $800 + 10units at $820) -$48,200

Cost of goods sold $196,900

C.Weighted average assumption

Cost of goods available for sale   -$245,100

Less: ending inventory 60 units at $830.85 ($245,100 ÷ 295) $49,851

Cost of goods sold $195,249

D. Gross Margin under FIFO

Sales  $352,500        (1,500 × 235)

Less: Cost of goods sold   $194,100

Gros sMargin $158,400

E.Income tax expense under LIFO

Sales  $352,500

Less: COGS  $196,900

GM $155,600

Less: operating exp  -$80,000

Income beforetax  $75,600

Less: Tax expense (30% of $75,600)  $22,680

Net Income $52,920

So, Income tax expense under the LIFO method is $ 22,680.

F. Tax saving using LIFO instead of FIFO

Gross margin under FIFO $158,400

Less: operating expense  -$80,000

Gross margin under FIFO -$78,400

less: tax expense 30% of $78,400-$23,520

Net Income $54,880

Tax saving is ($23,520 - $22,680 ) = $840.00