# AAA Hardware uses the LIFO method to value its inventory. Inventory at the beginning of the year consisted of 16,000 units of the company’s one product. These units cost \$10 each. During the year, 66,000 units were purchased at a cost of \$13 each and 67,000 units were sold. Near the end of the fiscal year, management is considering the purchase of an additional 8,000 units at \$13.a. What would be the effect of this purchase on income before income taxes? b. What would be the effect of this purchase on income before income taxes using FIFO method?

1. Net income decreases by \$3,000

2. The amount of net income would be remains the same.

Explanation:

1. Under LIFO method

(i) Before 8,000 units purchased:

sales = 67,000 units

Cost of goods sold = Quantity × Price

= (66,000 × \$13) + (1,000 × \$10)

= \$858,000 + \$10,000

= \$868,000

(ii) If 8,000 units purchased at \$13 each then,

Cost of goods sold = Quantity × Price

= 67,000 × \$13

= \$871,000

As the cost of goods increases as a result there will be decrease in the net income before tax under LIFO method.

The amount of net income would be decreased by:

= \$871,000  - \$868,000

= \$3,000

2. Under FIFO method:

(i) Before 8,000 units purchased:

sales = 67,000 units

Cost of goods sold = Quantity × Price

= (16,000 × \$10) + (51,000 × \$13)

= \$160,000 + \$663,000

= \$823,000

(ii) If 8,000 units purchased at \$13 each then,

Cost of goods sold = Quantity × Price

= (16,000 × \$10) + (51,000 × \$13)

= \$160,000 + \$663,000

= \$823,000

As there will be no change in the cost of goods sold, so, there will be no change in the net income before tax under FIFO method.

The amount of net income would be remains the same.

## Related Questions

onlon Chemicals manufactures paint thinner. Information on the work in process follows: Beginning inventory, 30,000 partially complete gallons. Transferred out, 157,500 gallons. Ending inventory (materials are 10 percent complete; conversion costs are 20 percent complete). Started this month, 180,000 gallons. Required: a. Compute the equivalent units for materials using the weighted-average method. b. Compute the equivalent units for conversion costs using the weighted-average method.

a. 162,750 gallons

b. 168,000 gallons

Explanation:

Step 1 Determine the Units of Closing Work In Process Inventory

Units of Closing Work In Process =  Beginning inventory units + units Started this month - units Transferred out

=  30,000+180,000-157,500

= 52,500

Step 2 Determine the equivalent units for materials

Note : materials are 10 percent complete in Units of Closing Work In Process

Units of Closing Work In Process ( 52,500 ×10%)  = 5,250

Units Transferred out ( 157,500 ×100%)                   =157,500

Total                                                                           =162,750

Step 3 Determine the equivalent units for conversion costs

Note : conversion costs are 20 percent complete in Units of Closing Work In Process

Units of Closing Work In Process ( 52,500 ×20%)  = 10,500

Units Transferred out ( 157,500 ×100%)                   =157,500

Total                                                                            =168,000

The equivalent units for conversion costs using the weighted-average method are 168,000

The equivalent units for materials using the weighted-average method are 162,750

Explanation:

onlon Chemicals

Equivalent units can be calculated by the following

Particulars            Units      % of Completion           Equivalent Units

Mat.  Con. Costs     Materials C. Costs

Transferred out, 157,500           100       100             157,500  157,500

Ending inventory, 52,500          10            20              5250      10,500

Total Equivalent Units                                                162,750   168,000

Working

Ending Inventory= Opening + Started - Transferred Out

Ending Inventory=30,000 +180,000 -157,500 = 52,500 gallons

The equivalent units are calculated by two ways either by adding ending inventory and transferred out units or by adding beginning inventory with units started.

Other things the same, an increase in taxes with no change in government purchases makes national saving a. rise. The supply of loanable funds shifts right. b. rise. The demand for loanable funds shifts right. c. fall. The supply of loanable funds shifts left. d. fall. The demand for loanable funds shifts left.

C

Explanation:

Loanable funds is  the total  amount of money individuals in an economy save and lend out out to borrowers

Increase in taxes would decrease the benefits of saving and as a result, national savings would reduce

If national savings reduce, the supply of loanable funds would also reduce. this would shift the supply curve to the left

True or False: Under the average-cost pricing policy, the cable company has no incentive to cut costs.

True.

Explanation:

The cable company will not have any incentive to cut costs.  This is because it knows that its costs will be averaged to determine the average cost to which a certain percentage is then added to arrive at the selling price.  Having the cost averaged in this way will not motivate the cable company to seek cost minimization strategies that it could use to increase its income.

The statement is false. Under the average-cost pricing policy, the cable company has the incentive to cut costs to potentially lower prices and increase market share.

### Explanation:

False, under the average-cost pricing policy, the cable company does have incentives to cut costs. The average-cost pricing policy allows the firm to set the price equal to the average cost of production. If the cable company can lower its cost of production, it will be able to lower the price it charges, which could potentially increase its market share and profits. Consider an example where economies of scale come into play: if each firm produced at a higher average cost due to building their own power lines, they would raise prices to cover this cost. However, if a firm found a way to reduce the cost of power lines or production in general, they could lower their prices in comparison to other firms. This demonstrates the incentive for cost-cutting under average-cost pricing.

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Elenor Company sells 400 units of inventory for \$40 each. The inventory originally cost Elenor \$26 each. What is Elenor’s gross profit on this transaction?

\$5,600

Explanation:

Data provided in the question:

Number of units of inventory sold = 400 units

Selling cost of the inventory = \$40 each

Original cost of the inventory = \$26 each

Now,

Total inventory cost of the units sold = 400 × \$26

= \$10,400

Total selling cost of the inventory sold = 400 × \$40

= \$16,000

Therefore,

Elenor’s gross profit on this transaction

= Total selling cost of the inventory sold - Total inventory cost of the units sold

= \$16,000 - \$10,400

= \$5,600

Elenor's gross profit is calculated by subtracting the total cost of inventory from the total sales revenue. With 400 units sold at \$40 each and a cost of \$26 each, the gross profit is \$5,600.

### Explanation:

To calculate Elenor's gross profit on the transaction, we need to deduct the total cost of the inventory from the total sales revenue. First, we calculate the total sales revenue: 400 units sold at \$40 each gives us \$16,000. Next, we calculate the total cost of the inventory: 400 units purchased at \$26 each costs Elenor \$10,400.

Now, to find the gross profit, we subtract the total cost from the sales revenue: \$16,000 - \$10,400 = \$5,600.

Therefore, Elenor's gross profit on this transaction is \$5,600.

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On January 1, 2011, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for \$62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of \$96,000 in 2011 and paid dividends of \$36,000. On January 1, 2012, Deuce bought an additional 10% of Wiz for \$54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2012, Wiz earned \$120,000 and paid \$48,000 in dividends. As of December 31, 2012, Wiz reported a net book value of \$468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill. What amount of equity income should Deuce have reported for 2012?

\$30,000

Explanation:

Calculation for the amount of equity income to reported

Using this formula

Equity income=[(Amount earned in 2012×(Outstanding common stock percentage +Additional percentage of Wiz)]

Let plug in the formula

Equity income = [(\$120,000 ×(15%+ 10%)]

Equity income = (\$120,000 ×25%)

Equity income= \$30,000

Therefore the amount of equity income to reported for 2012 will be \$30,000

On September 11, 2017, Home Store sells a mower (that costs \$370) for \$600 cash with a one-year warranty that covers parts. Warranty expense is estimated at 9% of sales. On July 24, 2018, the mower is brought in for repairs covered under the warranty requiring \$42 in materials taken from the Repair Parts Inventory. Prepare the September 11, 2017, entry to record the mower sale, and the July 24, 2018, entry to record the warranty repairs. (Round your answers to 2 decimal places.)

September 11 2017

Dr Cash                     600

Cr Sales revenue     600

(to record sales revenue on cash)

Dr Cost of good sold      370

Cr Inventory                   370

(to record cost of good sold)

Dr Warranty expenses        54

Cr Warranty liabilities          54

(to accrue for warranty liabilities)

Jul 24 2018

Dr Warranty liabilities         42

Cr Inventory                       42

(to record warranty services provided which was accrued)

Explanation:

11 Sep 2017:

- As sell of \$600 is made on cash with the cost of good sold is \$370, we Dr Cash 600 and Dr Cost of good sold 370 to record increase in cash and in Cost of good sold; and Cr Sales 600 and Cr Inventory 370 to record increase in sales and decrease in Inventory delivered.

- Warranty expenses should be recorded at the time to ensure matching of cost and revenue. Warranty expenses is estimated at 9% of sales, so it will be 9% x 600 = \$54. Expenses is recorded and liabilities is accrued.

Jul 24 2018:

Warranty liabilities which was accrued actually occurs. So we Dr Liability by the expenses actually incurred and Cr Inventory consumed for the warranty services \$42.