Broadhead Company uses a periodic inventory system. At the end of the annual acc

Question

Broadhead Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2:

Required:

1. Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO.

2. Compute the difference between the pretax income and the ending inventory amount for the two cases.

3. Which inventory costing method may be preferred for income tax purposes? LIFO or FIFO

Units Unit Cost Inventory, December 31, prior year 2,990 $ 11 For the current year: Purchase, April 11 8,810 9 Purchase, June 1 7,820 14 Sales ($60 each) 10,840 Operating expenses (excluding income tax expense) $ 189,000

Explanation / Answer

Answer =   CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER FIFO METHOD PURHASES COST OF GOODS SOLD CLOSING BALANCE Date Particulars Units (A) Rate Per unit Total Cost Units (A) Rate Per unit Total Cost Units (A) Rate Per unit Total Cost 1 Beginning inventory 2990 $11 $32,890 2990 $11 $32,890 2 Purchases April - 11 8810 9 $79,290 2990 $11 $32,890 8810 $9 $79,290 3 Purchases June - 1 7820 $14 $1,09,480 2990 $11 $32,890 8810 $9 $79,290 7820 $14 $1,09,480 3 Available For sale 19620 $2,21,660 Available For sale 19620 2990 $11 $32,890 Sales   10840 7850 9 $70,650 960 9 $8,640 Closing Stock 8780 7820 $14 $1,09,480 Total 10840 103540 8780 118120 Unit Amoun COGS as per FIFO Method 10840 $1,03,540.00 Closing Balance as per FIFO 8780 118120 CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER LIFO METHOD PURHASES COST OF GOODS SOLD CLOSING BALANCE Date Particulars Units (A) Rate Per unit Total Cost Units (A) Rate Per unit Total Cost Units (A) Rate Per unit Total Cost 1 Beginning inventory 2990 $11 $32,890 2990 $11 $32,890 2 Purchases April - 11 8810 9 $79,290 2990 $11 $32,890 8810 $9 $79,290 3 Purchases June - 1 7820 $14 $1,09,480 2990 $11 $32,890 8810 $9 $79,290 7820 $14 $1,09,480 3 Available For sale 19620 $2,21,660 Available For sale 19620 7820 $14 $1,09,480 Sales   10840 3020 $9 $27,180 2990 $11 $32,890 Closing Stock 8780 5790 9 $52,110 Total 10840 136660 8780 85000 Unit Amoun COGS as per LIFO Method 10840 $1,36,660.00 Closing Balance as per LIFO 8780 $85,000.00 Answer =2 Answer = FIFO LIFO Difference Sales (10,840 units X $ 60) $6,50,400.00 $6,50,400.00 Cost OF Goods Sold $1,03,540.00 $1,36,660.00 Gross Profit $5,46,860.00 $5,13,740.00 Less : Operating Expenses $1,89,000.00 $1,89,000.00 Pre tax Income $3,57,860.00 $3,24,740.00 $33,120.00 Closing Stock FIFO LIFO Difference $1,18,120.00 $85,000.00 $33,120.00 Answer =3 LIFO inventory method is preferred for income tax purpose because under this method Pretax income is less and taxation expenses will also came less. Preferred for income tax purpose = LIFO

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