Answer :
Let's break down the problem step-by-step using the FIFO and LIFO inventory valuation methods and then calculate the difference in taxes if LIFO rather than FIFO is used. We'll summarize the given data first:
Inventory Data:
- January 1: 9,500 units at [tex]$9.20 each - June 18: 8,600 units at $[/tex]8.00 each
- November 8: 6,100 units at [tex]$10.00 each Units on hand at December 31: 3,900 units Selling price per unit: $[/tex]12.00
Effective tax rate: 20%
### FIFO Method
Ending Inventory Cost Calculation:
The FIFO method values the ending inventory based on the most recent purchases first. Starting from the latest purchase in November and going backwards until we account for all 3,900 units.
1. November units: 3,900 * [tex]$10.00 (since 3,900 <= 6,100) 2. Total cost of ending inventory using FIFO: 3,900 * $[/tex]10.00 = [tex]$39,000 Cost of Goods Sold (COGS) Calculation: - Total units available for sale: 9,500 (Jan) + 8,600 (June) + 6,100 (Nov) = 24,200 units - Total cost of units available for sale: (9,500 $[/tex]9.20) + (8,600 [tex]$8.00) + (6,100 * $[/tex]10.00)
Total cost = [tex]$87,400 + $[/tex]68,800 + [tex]$61,000 = $[/tex]217,200
- COGS using FIFO: Total cost of units available for sale - FIFO ending inventory cost
COGS_FIFO = [tex]$217,200 - $[/tex]39,000 = [tex]$178,200 ### LIFO Method Ending Inventory Cost Calculation: The LIFO method values the ending inventory based on the oldest purchases first. Starting from the earliest purchase in January and proceeding forward until we account for all 3,900 units. 1. January units: 3,900 $[/tex]9.20 (since 3,900 <= 9,500)
2. Total cost of ending inventory using LIFO: 3,900 [tex]$9.20 = $[/tex]35,880
Cost of Goods Sold (COGS) Calculation:
- Same total units available for sale: 24,200 units
- Same total cost of units available for sale: [tex]$217,200 - COGS using LIFO: Total cost of units available for sale - LIFO ending inventory cost COGS_LIFO = $[/tex]217,200 - [tex]$35,880 = $[/tex]181,320
### Tax Calculation
Difference in COGS:
- COGS_LIFO - COGS_FIFO = [tex]$181,320 - $[/tex]178,200 = [tex]$3,120 Difference in Taxes (20% of the difference in COGS): - Difference in taxes: $[/tex]3,120 * 0.20 = [tex]$624 Thus, the correct answer is \$[/tex]624 additional taxes.
So, if LIFO is used instead of FIFO, Sunland Company would incur an additional tax of $624.
Inventory Data:
- January 1: 9,500 units at [tex]$9.20 each - June 18: 8,600 units at $[/tex]8.00 each
- November 8: 6,100 units at [tex]$10.00 each Units on hand at December 31: 3,900 units Selling price per unit: $[/tex]12.00
Effective tax rate: 20%
### FIFO Method
Ending Inventory Cost Calculation:
The FIFO method values the ending inventory based on the most recent purchases first. Starting from the latest purchase in November and going backwards until we account for all 3,900 units.
1. November units: 3,900 * [tex]$10.00 (since 3,900 <= 6,100) 2. Total cost of ending inventory using FIFO: 3,900 * $[/tex]10.00 = [tex]$39,000 Cost of Goods Sold (COGS) Calculation: - Total units available for sale: 9,500 (Jan) + 8,600 (June) + 6,100 (Nov) = 24,200 units - Total cost of units available for sale: (9,500 $[/tex]9.20) + (8,600 [tex]$8.00) + (6,100 * $[/tex]10.00)
Total cost = [tex]$87,400 + $[/tex]68,800 + [tex]$61,000 = $[/tex]217,200
- COGS using FIFO: Total cost of units available for sale - FIFO ending inventory cost
COGS_FIFO = [tex]$217,200 - $[/tex]39,000 = [tex]$178,200 ### LIFO Method Ending Inventory Cost Calculation: The LIFO method values the ending inventory based on the oldest purchases first. Starting from the earliest purchase in January and proceeding forward until we account for all 3,900 units. 1. January units: 3,900 $[/tex]9.20 (since 3,900 <= 9,500)
2. Total cost of ending inventory using LIFO: 3,900 [tex]$9.20 = $[/tex]35,880
Cost of Goods Sold (COGS) Calculation:
- Same total units available for sale: 24,200 units
- Same total cost of units available for sale: [tex]$217,200 - COGS using LIFO: Total cost of units available for sale - LIFO ending inventory cost COGS_LIFO = $[/tex]217,200 - [tex]$35,880 = $[/tex]181,320
### Tax Calculation
Difference in COGS:
- COGS_LIFO - COGS_FIFO = [tex]$181,320 - $[/tex]178,200 = [tex]$3,120 Difference in Taxes (20% of the difference in COGS): - Difference in taxes: $[/tex]3,120 * 0.20 = [tex]$624 Thus, the correct answer is \$[/tex]624 additional taxes.
So, if LIFO is used instead of FIFO, Sunland Company would incur an additional tax of $624.
