1.On January 1, 2017, the Overton Co. changed from FIFO to LIFO for income tax and financial reporting purposes. At that date, the beginning FIFO inventory, which will be the base inventory for LIFO purposes, was $150,000. The following information is available from Overton’s records (FIFO basis) for the year-ends 2016 through 2019:YearEnding Inventory under FIFOCost Index2016$150,0001.002017$176,0001.102018$185,0001.162019$200,0001.201a.If Overton computes LIFO ending inventory using the Dollar Value LIFO method, what is the amount of ending inventory that Overton would report on its 2017, 2018 and 2019 Balance Sheets?1b. Provide Overton’s adjusting journal entries at 12/31/17, 12/31/18 and 12/31/19 to record changes to the LIFO reserve as a result of reporting under LIFO.

QUESTION

1.On January 1, 2017, the Overton Co. changed from FIFO to LIFO for income tax and financial reporting purposes. At that date, the beginning FIFO inventory, which will be the base inventory for LIFO purposes, was $150,000. The following information is available from Overton’s records (FIFO basis) for the year-ends 2016 through 2019:YearEnding Inventory under FIFOCost Index2016$150,0001.002017$176,0001.102018$185,0001.162019$200,0001.201a.If Overton computes LIFO ending inventory using the Dollar Value LIFO method, what is the amount of ending inventory that Overton would report on its 2017, 2018 and 2019 Balance Sheets?1b. Provide Overton’s adjusting journal entries at 12/31/17, 12/31/18 and 12/31/19 to record changes to the LIFO reserve as a result of reporting under LIFO.

2. The Bonner Co. uses the LIFO cost flow assumption and has a periodic inventory system. Bonner has a 21% tax rate on all items. During 2019, the Bonner Co. had the following information about inventory:UnitsCost per unitBeginning Inventory12,000$805/1/19 Purchase10,000$12511/1/19 Purchase8,000$128Sales through 12/28/2019 total 23,000 unitsand the sales price per unit is $200. Bonner will not have any more sales during 2019. At 12/28/2019, the Bonner Co. is set tomake a purchase of 5,000 units at $130 per unit. The annual bonusawarded to Bonner’s sales team is stated asa percent of gross profit. The manager of the sales team has approached the manager of the purchasing department to suggest that the 12/28/2019 purchase should be delayed into 2020 when more information about product demand is available. 2a. What is the effect of delaying the 12/28/19 on the 2019 gross profit?(include the amount of the difference in gross profit between the two situations of purchasing at 12/28/19 or not purchasing at 12/28/19)2b. The purchasing manager approaches a colleague that works in the accounting department at Bonner about delaying the 12/28/19purchase. What is the accounting department colleague likely to tell the purchasing manager about the consequences of delaying the 12/28/19purchase into 2020? Be specific in your answer

ANSWER

1a. To compute the ending inventory using the Dollar Value LIFO method, we need to determine the cost of the ending inventory based on the LIFO cost flow assumption. The Dollar Value LIFO method takes into account changes in both inventory quantities and prices.

For each year, we can calculate the LIFO index by dividing the ending inventory under FIFO by the ending inventory cost. Then, we can multiply the LIFO index by the beginning FIFO inventory to determine the LIFO value of the base inventory.

Let’s calculate the LIFO ending inventory for each year:

2017:

Ending inventory under FIFO: $176,000

LIFO index: 1.10 (176,000 / 160,000)

LIFO ending inventory: 1.10 * 150,000 = $165,000

2018:

Ending inventory under FIFO: $185,000

LIFO index: 1.162 (185,000 / 159,000)

LIFO ending inventory: 1.162 * 150,000 = $174,300

2019:

Ending inventory under FIFO: $200,000

LIFO index: 1.201 (200,000 / 166,500)

LIFO ending inventory: 1.201 * 150,000 = $180,150

Therefore, Overton would report the following amounts of ending inventory on its 2017, 2018, and 2019 Balance Sheets:

– 2017: $165,000

– 2018: $174,300

– 2019: $180,150

1b. The adjusting journal entries at December 31, 2017, 2018, and 2019 would record changes to the LIFO reserve. The LIFO reserve represents the difference between the inventory value under FIFO and LIFO. Here’s how the entries would look:

At December 31, 2017:

Inventory Increase (Debit)     $15,000

LIFO Reserve (Credit)            $15,000

At December 31, 2018:

Inventory Increase (Debit)     $9,300

LIFO Reserve (Credit)            $9,300

At December 31, 2019:

Inventory Increase (Debit)     $5,850

LIFO Reserve (Credit)            $5,850

These journal entries reflect the changes in the LIFO reserve as a result of reporting under LIFO. The LIFO reserve will gradually increase over the years as the difference between FIFO and LIFO values accumulates.

2a. The effect of delaying the December 28, 2019 purchase on the 2019 gross profit can be analyzed by comparing the two situations: purchasing at December 28, 2019, or not purchasing at that date.

If the purchase is made on December 28, 2019:

– Total units available for sale: 12,000 (beginning inventory) + 10,000 (May purchase) + 8,000 (November purchase) + 5,000 (December 28 purchase) = 35,000 units

– Cost of goods sold (COGS): 23,000 units * $128 per unit (cost of the November purchase) = $2,944,000

– Gross profit: Sales revenue – COGS = (23,000 units * $200 per unit) – $2,944,000 = $1,112,000

If the purchase is delayed into 2020:

– Total units available for sale: 12,000 (beginning inventory) + 10,000 (May purchase) + 8,000 (November purchase) = 30,000 units

– COGS: 23,000 units * $128 per unit (cost of the November purchase) = $2,944,000

– Gross profit: Sales revenue – COGS = (23,000 units * $200 per unit) – $2,944,000 = $1,112,000

Therefore, delaying the December 28, 2019 purchase does not have an immediate impact on the 2019 gross profit. The gross profit remains the same in both situations.

2b. The accounting department colleague is likely to inform the purchasing manager about the consequences of delaying the December 28, 2019 purchase into 2020. The colleague would explain that the timing of the purchase affects the company’s financial statements and taxable income for the current year.

Delaying the purchase into 2020 means the cost of goods sold (COGS) for 2019 remains at the level based on the November purchase. This could potentially result in higher gross profit for 2019, as the COGS does not include the cost of the December 28 purchase. However, it’s important to note that this increase in gross profit is temporary and does not reflect the true profitability of the company.

From a tax perspective, delaying the purchase could have consequences as well. The Bonner Co. uses the LIFO cost flow assumption and has a 21% tax rate. LIFO allows for the recognition of higher costs when calculating COGS, which leads to lower taxable income. By delaying the purchase, the company would miss the opportunity to include the higher cost of the December 28 inventory in the COGS calculation, potentially resulting in higher taxable income and higher tax liability for the current year.

Ultimately, the purchasing manager should consider both the short-term impact on gross profit and the potential long-term tax implications before making a decision to delay the purchase. It’s essential to align the timing of inventory purchases with the company’s overall financial and tax strategies.