Question

Johnson Corporation began 2016 with inventory of 10,000 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 2016:

a. Purchased 50,000 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 $.50 per unit were paid by Johnson.

b. 1,000 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $.50 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.

c. Sales for the year totaled 45,000 units at $18 per unit.

d. On December 28, 2016, Johnson purchased 5,000 additional units at $10 each. The goods were shipped f.o.b. destination and arrived at Johnson’s warehouse on January 4, 2017.

e. 14,000 units were on hand at the end of 2016.

Required:

1. Determine ending inventory and cost of goods sold for 2016.

2. Assuming that operating expenses other than those indicated in the above transactions amounted to $150,000, determine income before income taxes for 2016.

Answer 1

1	Ending Inventory
Beginning inventory	10000*8	80000
Add:
Purchases (50000-1000 returned-45000 sold)	4000*10	40000
Freight	4000*0.5	2000
Purchaase Discounts	40000*2%	-800
Ending Inventory		121200
Cost of Goods Sold
Gross Cost of Purchases	45000*10 per ut	450000
Freight	45000*0.5	22500
Purchaase Discounts	450000*2%	-9000
Cost of Goods Sold		463500
b
Sales	45000*18	810000
Cost of Goods Sold	Above	-463500
Operating expenses		-150000
Income before taxes		196500
Since these goods were shipped f.o.b. destination and they won't arrive until after the end of the year, they are excluded from ending inventory and cost of goods sold.