Question

What happens when a company is operating in an inflationary environment?

The company's net income will be higher if it uses LIFO than if it uses FIFO.

Rosewood Company made a loan of $9200 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. Rosewood Company's fiscal year-end is December 31. What is the amount of interest revenue that Rosewood would report in Year 1 and Year 2, respectively?

		$0 in Year 1 and $552 in Year 2
		$552 in Year 1 and $0 in Year 2
		$414 in Year 1 and $138 in Year 2
		$138 in Year 1 and $414 in Year 2

Answer 1

1

In an inflationary environment, the amount of inventory on the company's balance sheet will be lower if it uses LIFO as opposed to FIFO cost flow.

Note: The company's net income will be higher under FIFO

2

Interest revneue will be recognized in Year 1 for 9 months(April-Dec) and for 3 months in Year 2

Interest revenue in Year 1 = 9200*6%*9/12= $414

Interest revenue in Year 2 = 9200*6%*3/12= $138

Option 3 $414 in Year 1 and $138 in Year 2 is correct