3) Zach Company started its merchandising business on February 1, 2006 by invest

Question

3) Zach Company started its merchandising business on February 1, 2006 by investing $30,000 in the business in exchange for common stock. On February 3, Zach purchased 200 units of inventory at a unit cost of $75. On February 7, Zach purchased another 750 units at a unit cost of $80 and on February 18 purchased another 1,000 units at a unit cost of $95. During the month of February, Zach sold 1,750 units of inventory for $125 per unit. Zach uses a periodic inventory system. During the month of February, Zach incurred $55,000 worth of operating expenses and has an income tax rate of 30%. (10 points) Required Based on the information provided, prepare all three multi-step income statements for Zach assuming the LIFO, FIFO and Weighted average cost flow assumptions. BFS Company sold an asset for $7,500 in cash. The asset had an historical cost of $30,000 and accumulated depreciation of $20,000 on the day it was sold. How much is the gain or loss on the sale? Show how the cash activity would appear on the accounting equation (as a gain or loss). (5 points)

Explanation / Answer

Answer 3. Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost 3-Feb Purchases                 200              75.00          15,000 7-Feb Purchases                 750              80.00          60,000 18-Feb Purchases             1,000              95.00          95,000 Total             1,950        170,000 Sales: Date Explanation Units Unit Cost Total Cost feb sales             1,750            125.00        218,750 Total             1,750        218,750 Ending Inventory (In Units) = 1,950 Units - 1,750 Units = 200 Units FIFO Method Value of Ending Inventory Date Units Unit Cost Total Cost 18-Feb                                200             95.00            19,000 Total                                200            19,000 Cost of Goods Sold: Beginning Inventory                     -   Add: Purchases          170,000 Cost of Goods Available for Sale          170,000 Less: Ending Inventory            19,000 Cost of Goods Sold          151,000 LIFO Method Value of Ending Inventory Date Units Unit Cost Total Cost 3-Feb                                200                   75            15,000 Total                                200            15,000 Cost of Goods Sold: Beginning Inventory                     -   Add: Purchases          170,000 Cost of Goods Available for Sale          170,000 Less: Ending Inventory            15,000 Cost of Goods Sold          155,000 Average Cost Per Unit = $170,000 (Cost of goods available for sale) / 1950 Units ( Units Available for Sale) Average Cost Per Unit = $87.18 per Unit (Approx.) Value of Ending Inventory = 200 Units X $87.18 per unit Value of Ending Inventory = $17,435.90 or say $17,436 (approx.) Cost of Goods Sold: Beginning Inventory                     -   Add: Purchases          170,000 Cost of Goods Available for Sale          170,000 Less: Ending Inventory            17,436 Cost of Goods Sold          152,564 Multi-Step Income Statement FIFO LIFO Weighted Average Sales               218,750            218,750             218,750 Cost of Goods Sold               151,000            155,000             152,564 Gross Margin                 67,750              63,750                66,186 Operating Expenses                 55,000              55,000                55,000 Net Operating Income                 12,750                8,750                11,186 Income Tax - 30%                   3,825                2,625                  3,356 Net Income                   8,925                6,125                  7,830

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