Chapter 8, Problem 8.10P

LIFO liquidation

• LO8–4, LO8–6

Cansela Corporation uses a periodic inventory system and the LIFO method to value its inventory. The company began 2018 with inventory of 4,500 units of its only product. The beginning inventory balance of $64,000 consisted of the following layers:

During the three years 2018–2020 the cost of inventory remained constant at $18 per unit. Unit purchases and sales during these years were as follows:

	Purchases	Sales
2018	10,000	11,000
2019	13,000	14,500
2020	12,000	13,000

Required:

1. Calculate cost of goods sold for 2018, 2019, and 2020.

2. Disregarding income tax, determine the LIFO liquidation profit or loss, if any, for each of the three years.

3. Prepare the company’s LIFO liquidation disclosure note that would be included in the 2020 financial statements to report the effects of any liquidation on cost of goods sold and net income. Assume any liquidation effects are material and that Cansela’s effective income tax rate is 40%. Cansela’s 2020 financial statements include income statements for two prior years for comparative purposes.