3 a under the perpetual lifo method the company

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3.a.Under the perpetual LIFO method, the company begins with 3,200 units at $64.30. Added to this is the March 4 purchase of 3,400 units at $64.75. The March 14 sale uses all of the March 4 purchase and 200 of the original inventory units. Thus, the firm is left with 3,000 units at $64.30. The March 25 purchase of 3,500 at $66 is added to the previous 3,000 units. The March 28 sale of 3,450 units comes entirely from the March 25 purchase, leaving just 50 of those units at $66 each. Thus, at the end of the month, the inventory consists of two layers: 3,000 units at $64.30 ($192,200), and 50 units at $66 ($3,300). Adding the two together produces a total ending inventory of $196,200.Requirement 1Without purchase of the additional units:Sales (35,000 @ $60)$2,100,000Cost of goods sold (35,000 x $30)(1,050,000)Gross profit$1,050,000Due Jim Lester($1,050,000 x 20%)= $210,000With purchase of the additional units:Sales $2,100,000Cost of goods sold:20,000 x $40$800,00015,000 x $30450,000(1,250,000)Gross profit$ 850,0008-2CASESEthics Case 8-7
Chapter 08 - Inventories: MeasurementDue Jim Lester($850,000 x 20%)= $170,000Requirement 2Discussion should include these elements.Facts:If Moncrief purchases the additional units at year end under a periodic LIFO inventory system, the transaction results in a reduced payment to Jim Lester, reduced profits to shareholders, and reduced income tax payments to government entities. By purchasing the additional units of Zelenex, Moncrief reduces Jim Lester's payment by $40,000 ($210,000 - $170,000) and decreases gross profit by $200,000 ($1,050,000 - $850,000). The net effect on before-tax income is a decrease of $160,000 ($200,000 - $40,000). Since Moncrief does not intend to sell the units until 2012, the only logical reason for purchasing more costly inventory at year-end is profit manipulation.Ethical Dilemma:Should Moncrief exercise its right to purchase inventory at will, resulting in a reduction in net income, or recognize the rights of Jim Lester to receive profit for the sale of his product, shareholders' rights to have their investment appreciate through positive earnings, and government entities' rights to collect tax on economic net income?8-3

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