Questions: Problem 1: Textbook problem M6-18 (page 6-39) (Please refer to the textbook - 'Financial Accounting for MBAs" by Easton et al.) Assume 1,600 units are sold, instead of 2,000 given in the book. Also assume that the income tax rate is at 40% flat. Fill the answer below: LO6-1 M6-18. Computing Cost of Goods Sold and Ending Inventory Under FIFO, LIFO, and Average Cost Assume that Madden Company reports the following initial balance and subsequent purchase of inventory. Inventory begins at beginning of year, Inventory purchased during the year. 1,300 units 150 each 1,700 units 180 each 195,000 306,000 Cost of goods available for sale during the year. 3,000 units 501,000 b. LIFO cost of goods sold = Inventory Purchases: Beginning Inventory: 1,300 units at 150 = 195,000 Purchases: 1,700 units at 180 each = 306,000 Total Units Available for Sale: 3,000 units Units Sold: 1,600 units COGS under LIFO: From the last 1,700 units purchased at 180, we sell 1,600 units (all from this layer). Total LIFO COGS = 1,600 units x 180 = 288,000 LIFO ending inventories = After selling 1,600 units, the remaining inventory will consist of 3,000 (total units available) - 1,600 (units sold) = 1,400 remaining inventory After selling all 1,600 units from the recent purchase at 180, there will still be 100 out of the original 1,700 units left at 180. Plus we have the 1,300 units at 150 (all that remain). Total Value of Ending Inventory: (100 units x 180) + (1,300 units x 150) = 18,000 + 195,000 = 213,000. LIFO Ending Inventories = 213,000 Problem 2: Follow-up to Problem 1 (above): Assume in the next year (Year 2), assume that Madden Corp purchases 1,500 units of inventory at a unit price of 170 and sold 2,000 units. For this second year, answer the following questions: a.) LIFO cost of goods sold = b.) LIFO ending inventories =

Problem 1: Textbook problem M6-18 (page 6-39) (Please refer to the textbook - 'Financial Accounting for MBAs" by Easton et al.) Assume 1,600 units are sold, instead of 2,000 given in the book. Also assume that the income tax rate is at 40% flat. Fill the answer below: LO6-1 M6-18. Computing Cost of Goods Sold and Ending Inventory Under FIFO, LIFO, and Average Cost Assume that Madden Company reports the following initial balance and subsequent purchase of inventory. Inventory begins at beginning of year, Inventory purchased during the year. 1,300 units 150 each 1,700 units 180 each 195,000 306,000 Cost of goods available for sale during the year. 3,000 units 501,000 b. LIFO cost of goods sold = Inventory Purchases: Beginning Inventory: 1,300 units at 150 = 195,000 Purchases: 1,700 units at 180 each = 306,000 Total Units Available for Sale: 3,000 units Units Sold: 1,600 units COGS under LIFO: From the last 1,700 units purchased at 180, we sell 1,600 units (all from this layer). Total LIFO COGS = 1,600 units x 180 = 288,000 LIFO ending inventories = After selling 1,600 units, the remaining inventory will consist of 3,000 (total units available) - 1,600 (units sold) = 1,400 remaining inventory After selling all 1,600 units from the recent purchase at 180, there will still be 100 out of the original 1,700 units left at 180. Plus we have the 1,300 units at 150 (all that remain). Total Value of Ending Inventory: (100 units x 180) + (1,300 units x 150) = 18,000 + 195,000 = 213,000. LIFO Ending Inventories = 213,000 Problem 2: Follow-up to Problem 1 (above): Assume in the next year (Year 2), assume that Madden Corp purchases 1,500 units of inventory at a unit price of 170 and sold 2,000 units. For this second year, answer the following questions: a.) LIFO cost of goods sold = b.) LIFO ending inventories =
Transcript text: Problem 1: Textbook problem M6-18 (page 6-39) (Please refer to the textbook - 'Financial Accounting for MBAs" by Easton et al.) Assume 1,600 units are sold, instead of 2,000 given in the book. Also assume that the income tax rate is at $40 \%$ flat. Fill the answer below: LO6-1 M6-18. Computing Cost of Goods Sold and Ending Inventory Under FIFO, LIFO, and Average Cost Assume that Madden Company reports the following initial balance and subsequent purchase of inventory. \begin{tabular}{|c|c|c|} \hline Inventory bexpas at beginning of year, Inventory purchased during the year. & \begin{tabular}{l} 1,300 units @ $\$ 150$ each \\ 1,700 units $9 \$ 180$ each \end{tabular} & \[ \begin{array}{l} \$ 195,000 \\ 306,000 \end{array} \] \\ \hline Cost of goods available for sale during the year. & 3,000 units & \$501.000 \\ \hline \end{tabular} b. LIFO cost of goods sold = Inventory Purchases: Beginning Inventory: 1,300 units at $\$ 150=\$ 195,000$ Purchases: 1,700 units at $\$ 180$ each $=\$ 306,000$ Total Units Available for Sale: 3,000 units Units Sold: 1,600 units COGS under LIFO: From the last 1,700 units purchased at $\$ 180$, we sell 1,600 units (all from this layer). Total LIFO COGS $=\mathbf{1 , 6 0 0}$ units $\mathbf{x} \$ 180=\$ 288,000$ LIFO ending inventories = After selling 1,600 units, the remaining inventory will consist of 3,000 (total units available)1,600 (units sold) $=1,400$ remaining inventory- After selling all 1,600 units from the recent purchase at $\$ 180$, there will still be 100 out of the original 1,700 units left at $\$ 180$. Plus we have the 1,300 units at $\$ 150$ (all that remain). Total Value of Ending Inventory: $(100$ units $\mathbf{x} \$ 180)+(1,300$ units x $\$ 150)=\$ 18,000+$ $\$ 195,000=\$ 213,000$. LIFO Ending Inventories $=\mathbf{\$ 2 1 3 , 0 0 0}$ Problem 2: Follow-up to Problem 1 (above): Assume in the next year (Year 2), assume that Madden Corp purchases 1,500 units of inventory at a unit price of $\$ 170$ and sold 2,000 units. For this second year, answer the following questions: a.) LIFO cost of goods sold = b.) LIFO ending inventories =
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Solution

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Solution Steps

Solution Approach

  1. Problem 1:

    • Calculate the Cost of Goods Sold (COGS) under LIFO by selling the most recently purchased inventory first.
    • Calculate the ending inventory by subtracting the sold units from the total available units and valuing the remaining inventory based on the LIFO method.

  2. Problem 2:

    • For the second year, calculate the LIFO COGS by selling the most recently purchased inventory first.
    • Calculate the ending inventory by subtracting the sold units from the total available units and valuing the remaining inventory based on the LIFO method.
Step 1: Calculate LIFO Cost of Goods Sold (COGS) for Year 1

To determine the LIFO COGS for Year 1, we sell the most recently purchased inventory first. Given that we sold \( 1,600 \) units from the \( 1,700 \) units purchased at \( \$ 180 \):

\[ \text{LIFO COGS} = 1,600 \times 180 = 288,000 \]

Step 2: Calculate LIFO Ending Inventory for Year 1

After selling \( 1,600 \) units, the remaining inventory consists of \( 1,400 \) units. The remaining inventory includes \( 100 \) units from the last purchase at \( \$ 180 \) and \( 1,300 \) units from the beginning inventory at \( \$ 150 \):

\[ \text{LIFO Ending Inventory} = (100 \times 180) + (1,300 \times 150) = 18,000 + 195,000 = 213,000 \]

Step 3: Calculate LIFO Cost of Goods Sold (COGS) for Year 2

In Year 2, Madden Corp purchases \( 1,500 \) units at \( \$ 170 \) and sells \( 2,000 \) units. The LIFO COGS is calculated as follows:

  • First, we sell all \( 1,500 \) units purchased at \( \$ 170 \): \[ 1,500 \times 170 = 255,000 \]
  • Then, we sell \( 500 \) units from the previous year's remaining inventory at \( \$ 180 \): \[ 500 \times 180 = 90,000 \]
  • Therefore, the total LIFO COGS for Year 2 is: \[ \text{Year 2 LIFO COGS} = 255,000 + 90,000 = 345,000 \]
Step 4: Calculate LIFO Ending Inventory for Year 2

After selling \( 2,000 \) units, the remaining inventory consists of \( 900 \) units. The remaining inventory includes \( 1,200 \) units from the previous year's inventory at \( \$ 180 \) and \( 0 \) units from the current year's purchase at \( \$ 170 \):

\[ \text{Year 2 LIFO Ending Inventory} = 900 \times 180 = 162,000 \]

Final Answer

  • LIFO COGS for Year 1: \( \boxed{288,000} \)
  • LIFO Ending Inventory for Year 1: \( \boxed{213,000} \)
  • LIFO COGS for Year 2: \( \boxed{345,000} \)
  • LIFO Ending Inventory for Year 2: \( \boxed{162,000} \)
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