Question

Speed World Cycles sells high-performance motorcycles and motocross racers. One of Speed World’s most popular models is the Kazomma 900 dirt bike. During the current year, Speed World Cycles purchased eight of these bikes at the following costs.



Purchase Date Units Purchased Unit Cost Total Cost
July 1 2 $ 4,950 $ 9,900
July 22 3 5,000 15,000
Aug. 3 3 5,100 15,300
8 $ 40,200


On July 28, Speed World Cycles sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World’s fiscal year.

Assume that Speed World Cycles uses a perpetual inventory system. (See the data provided.)

Required:

a-1. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using Average cost.

a-2. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using FIFO method.

a-3. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using LIFO method.

b-1. Which of the three cost flow assumptions will result in Speed World Cycles reporting the highest net income for the current year?

b-2. Which of the three cost flow assumptions minimizes the income taxes owed by Speed World Cycles for the year?

b-3. May Speed World Cycles use the cost flow assumption that results in the highest net income for the current year in its financial statements, but use the cost flow assumption that minimizes taxable income for the current year in its income tax return?

Answer 1

Answer:

Speed World Cycles

 

a.                                        Average Cost       FIFO              LIFO

Cost of goods sold           $20,100           $19,900       $20,300

Ending inventory              $20,100          $20,300       $19,900

b-1. FIFO will result in Speed World Cycles reporting the highest net income for the current year, because of the reduced cost of goods sold.

b-2. LIFO minimizes the income taxes owed by Speed World Cycles for the year, because it reduces the income before taxes.

b-3. Yes.  However, the cost flow assumptions self-correct in later years, by which time it is not allowed to be jumping from one cost flow assumption to another.

Explanation:

a) Data and Calculations:

Purchase Date    Units Purchased   Unit Cost     Total Cost

July 1                             2                    $ 4,950        $ 9,900

July 22                          3                       5,000          15,000

Aug. 3                           3                        5,100          15,300

Total                             8                                       $ 40,200

July 28 Sold                4                          

September 30            4 (8 - 4)

Average cost = $40,200/8 = $5,025

a-1. Cost of goods sold = $20,100 (4 * $5,025)

Ending inventory = $20,100 (4 * $5,025)

a-2. FIFO:

Ending inventory = $20,300 (3 * $5,100 + 1 * $5,000)

Cost of goods sold = Cost of goods available minus cost of ending inventory

= $40,200 - $20,300

= $19,900

a-3 LIFO:

Cost of goods sold = $20,300 (3 * $5,100 + 1 * $5,000)

Ending inventory = Cost of goods available minus cost of goods sold

= = $40,200 - $20,300

= $19,900