Johnson Corporation began 2018 with inventory of 14,000 units of its only produc
ID: 2600990 • Letter: J
Question
Johnson Corporation began 2018 with inventory of 14,000 units of its only product. The units cost $8 each. The company uses a periodic inventory system and the LIFO cost method. The following transactions occurred during 2018:
Purchased 70,000 additional units at a cost of $10 per unit. Terms of the purchases were 2/10, n/30, and 100% of the purchases were paid for within the 10-day discount period. The company uses the gross method to record purchase discounts. The merchandise was purchased f.o.b. shipping point and freight charges of $0.40 per unit were paid by Johnson.
1,400 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $0.40 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.
Sales for the year totaled 65,000 units at $18 per unit.
On December 28, 2018, Johnson purchased 5,400 additional units at $10 each. The goods were shipped f.o.b. destination and arrived at Johnson's warehouse on January 4, 2019.
17,600 units were on hand at the end of 2018.
Required:
1. Complete the below table to determine the ending inventory and cost of goods sold for 2018.
2. Assuming that operating expenses other than those indicated in the above transactions amounted to $158,000, determine income before income taxes for 2018.
Explanation / Answer
Requirement 1
Beginning inventory (14,000 x $8.00) $ 112,000
Net purchases:
Purchases (70,000* units x $10.00) $700,000
Less: Returns (1,400 units x $10.40) (14,560)
Less: Purchase discounts
($700,000 x 2%) (14,000)
Plus: Freight-in (70,000 units x $.40) 28,000 699,440
Cost of goods available (82,600 units) 811,440
Less: Ending inventory (below) (148,720)
Cost of goods sold $662,720
* The 5,400 units purchased on December 28 are not included. The merchandise was shipped f.o.b. destination and did not arrive at Johnson’s warehouse until 2019.
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
Beg. Inv. 14,000 $ 8.00 $ 112,000
2018 3,600 10.20** 36,720
Total 17,600 $148,720
**$10 x 98% = $9.80 + .40 in freight charges = $10.20
Requirement 2
Sales (65,000 units x $18.00) $1,170,000
Less:
Cost of goods sold (above) $662,720
Other operating expenses 158,000 (820,720)
Income before income taxes $349,280
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