Computing and Analyzing a LIFO LiquidationChide Inc. changed its inventory method to LIFO effective January 1. During December, Chide's storage facility was shut down due to a strikeresulting in a drastic reduction in inventory. The following data are available.UnitUnits CostBeginning inventory (Base layer of LIFO-January 1) 20,000 $1.00Inventory purchases during the yearTotal cost of goods sold available for saleGoods sold (valued on a LIFO basis) from:450,000 1.25470,000Purchases layerBase inventory layerTotal cost of goods sold450,000 1.2510,000 1.00Ending inventory (December 31)460,00010,000a. What is the effect of the LIFO liquidation on after-tax profit or loss assuming a 25% tax rate?$ 10,000Increase to after tax profit ✰b. What is the accounting explanation for LIFO liquidation?Due to lower cost inventory matched to current selling price which has increased over time. ÷

LIFO (Last-In, First-Out) liquidation refers to the process of selling or consuming inventory items…

Computing and Analyzing a LIFO Liquidation Chide Inc. changed its inventory method to LIFO effective January 1. During December, Chide's storage facility was shut down due to a strike resulting in a drastic reduction in inventory. The following data are available. Unit Units Cost Beginning inventory (Base layer of LIFO-January 1) 20,000 $1.00 Inventory purchases during the year 450,000 1.25 Total cost of goods sold available for sale 470,000 Goods sold (valued on a LIFO basis) from: Purchases layer 450,000 1.25 10,000 1.00 Base inventory layer Total cost of goods sold Ending inventory (December 31) 460,000 10,000 a. What is the effect of the LIFO liquidation on after-tax profit or loss assuming a 25% tax rate? $ 10,000 × Increase to after tax profit b. What is the accounting explanation for LIFO liquidation? Due to lower cost inventory matched to current selling price which has increased over time.

Computing and Analyzing a LIFO Liquidation Chide Inc. changed its inventory method to LIFO effective January 1. During December, Chide's storage facility was shut down due to a strike resulting in a drastic reduction in inventory. The following data are available. Unit Units Cost Beginning inventory (Base layer of LIFO-January 1) 20,000 $1.00 Inventory purchases during the year 450,000 1.25 Total cost of goods sold available for sale 470,000 Goods sold (valued on a LIFO basis) from: Purchases layer 450,000 1.25 10,000 1.00 Base inventory layer Total cost of goods sold Ending inventory (December 31) 460,000 10,000 a. What is the effect of the LIFO liquidation on after-tax profit or loss assuming a 25% tax rate? $ 10,000 × Increase to after tax profit b. What is the accounting explanation for LIFO liquidation? Due to lower cost inventory matched to current selling price which has increased over time.

Financial Accounting: The Impact on Decision Makers

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Chapter5: Inventories And Cost Of Goods Sold

Section: Chapter Questions

Problem 5.12AMCP

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Question

Computing and Analyzing a LIFO Liquidation
Chide Inc. changed its inventory method to LIFO effective January 1. During December, Chide's storage facility was shut down due to a strike
resulting in a drastic reduction in inventory. The following data are available.
Unit
Units Cost
Beginning inventory (Base layer of LIFO-January 1) 20,000 $1.00
Inventory purchases during the year
Total cost of goods sold available for sale
Goods sold (valued on a LIFO basis) from:
450,000 1.25
470,000
Purchases layer
Base inventory layer
Total cost of goods sold
450,000 1.25
10,000 1.00
Ending inventory (December 31)
460,000
10,000
a. What is the effect of the LIFO liquidation on after-tax profit or loss assuming a 25% tax rate?
$ 10,000
Increase to after tax profit ✰
b. What is the accounting explanation for LIFO liquidation?
Due to lower cost inventory matched to current selling price which has increased over time. ÷

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