Solution

1. $260,000 – ($260,000 X 0.25) = $195,000;

$195,000 – ($195,000 X 0.10) = $175,500, cost of goods
purchased

2. $1,761,000 + $85,500 = $1,846,500. The $85,500 of goods in

transit on which title had passed on December 28 (f.o.b.
shipping point) should be added to 12/31/2014 inventory. The
$61,000 of goods shipped (f.o.b. shipping point) on January 1,
2015, should remain part of the 12/31/2014 inventory.

3. Because no date was associated with the units issued or sold,

the periodic (rather than perpetual) inventory method must be
assumed.

FIFO inventory cost: 500 units at $65 $ 32,500

1,000 units at 66 66,000
Total $ 98,500

LIFO inventory cost: 1,000 units at $62 $ 62,000

500 units at 63 31,500
Total $ 93,500

Average cost: 1,000 at $62 $ 62,000

3,000 at 63 189,000
2,000 at 65 130,000
1,000 at 66 66,000
Totals 7,000 $447,000

$447,000 ÷ 7,000 = $63.86

Ending inventory (1,500 X $63.86) is $95,790.

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4. The accounts in the 2015 financial statements which would be affected by
a change to LIFO and the new amount for each of the accounts are as follows:
New amount for
Account 2015
(1) Cash $106,800
(2) Inventory 280,000
(3) Retained earnings 387,400
(4) Cost of goods sold 1,008,000
(5) Income taxes 89,700

The calculations for both 2014 and 2015 to support the conversion to LIFO are presented
below.

Income for the Years Ended 12/31/2014 12/31/2015

Sales revenue $1,920,000 $2,625,000
Less: Cost of goods sold 720,000 1,008,000
Other expenses 975,000 1,318,000
1,695,000 2,326,000
Income before taxes 225,000 299,000
Income taxes (30%) 67,500 89,700
Net income $157,500 $ 209,300

Cost of Goods Sold and

Ending Inventory for the Years Ended 12/31/2014 12/31/2015
Beginning inventory ( 70,000 X $4.00) $280,000 ( 70,000 X $4.00) $280,000
Purchases (160,000 X $4.50) 720,000 (210,000 X $4.80) 1,008,000
Cost of goods available 1,000,000 1,288,000
Ending inventory ( 70,000 X $4.00) (280,000) ( 70,000 X $4.00) (280,000)
Cost of goods sold $720,000 $1,008,000

Determination of Cash at 12/31/2014 12/31/2015

Income taxes under FIFO $ 78,000 $96,000
Income taxes as calculated under LIFO 67,500 89,700
Increase in cash 10,500 6,300
Adjust cash at 12/31/2015 for 2014 tax
difference — 10,500
Total increase in cash 10,500 16,800
Cash balance under FIFO 75,000 90,000
Cash balance under LIFO $85,500 $106,800

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Determination of Retained Earnings at 12/31/2014 12/31/2015
Net income under FIFO $182,000 $224,000

Net income under LIFO (157,500) (209,300)

Reduction in retained earnings 24,500 14,700

Adjust retained earnings at 12/31/2015

for 2014 reduction — 24,500

Total reduction in retained earnings 24,500 39,200

Retained earnings under FIFO 385,000 421,000

Retained earnings under LIFO $360,500 $381,800