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Accounting - LIFO, FIFO, bonds and treasury stock

1. A company uses the FIFO inventory method and reports the following data for 2004:
Beginning Inventory $75,000
Purchases during 2004 300,000
Ending Inventory 100,000
Income before income taxes 80,000
Tax Rate 40%

If the company had used LIFO ending inventory would have been valued at 85,000 dollars
a. Compute the tax liability using FIFO
b. Compute the tax liability if the company had used the LIFO inventory method.

5. On April 1, 2004 Bob Allen Wrench Company issues 1,000,000 of 7% 10 year bonds, with interest payments made each Oct 1 and April 1. The bonds are issued at 98. Bob's Allen Wrench Company amortizes any premium or discount using the Straight line method
a. Prepare the journal entry on April, 2004 to issue the bonds
b. Prepare the journal entry on October 1, 2004 to record the payment of interest and the amortization of any discount or premium.
c. Prepare the journal entry on December 31, 2004 to record the accrued interest and amortization of any discount or premium

18. A company issued 1,000,000 of 6.5% 8-year bonds dated June 1, 2004 with semiannual interest payments on June 1 and December 1. The bonds were issued on June 1, 2004 at 103 3/8. The company's year end is December 31.
a. Were the bonds issued at a premium, a discount, or at par?
b. Was the market rate of interest higher, lower, or the same as the contract rate of interest?
c. If the company uses the straight-line method of amortization what is the amount of interest expense the company will show for the year ended December 31, 2004?
d. What is the carrying value of the bonds on December 31, 2004?

21. Waterford Place Corporation has issued 75,000 shares of $10 par value common stock. The average issuance price was $23 per share. Waterford Place Corporation recently engaged in the following treasury stock transactions.
a. Purchased 15,000 shares of its own stock at $25.00 per share
b. Sold 2,500 shares of the treasury stock for $25.50 per share
c. Sold the remaining 12,500 shares of treasury stock for $24.00 per share.

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I am giving the answers and explanations below. I hope these would help you in your understanding.

1. A company uses the FIFO inventory method and reports the following data for 2004:
Beginning Inventory $75,000
Purchases during 2004 300,000
Ending Inventory 100,000
Income before income taxes 80,000
Tax Rate 40%

If the company had used LIFO ending inventory would have been valued at 85,000 dollars
a. Compute the tax liability using FIFO

The income before taxes is given as $80,000 and the tax rate is 40%. The income tax liability would be 40% of the income before tax which comes to 32,000

b. Compute the tax liability if the company had used the LIFO inventory method.
Under LIFO, the closing inventory is given as 85,000. The cost of goods sold (COGS) is calculated as opening inventory + purchases-closing inventory. In FIFO method the closing inventory is 100,000 and the income before tax is 80,000. If the ending inventory becomes 85,000, then the cost of goods sold value would rise by 15,000. As you can see under FIFO COGS is 75,000+300,000-100,000 = 275,000 and under LIFO it would be 75,000+300,000-85,000=290,000. If the COGS rises by 15,000 the income before tax would reduce by 15,000 since COGS is an expense item. Under LIFO the income before tax would become 80,000-15,000=65,000 and the tax liability would be 40% of this = $26,000.

5. On April 1, 2004 Bob Allen Wrench Company issues 1,000,000 of 7% 10 year bonds, with interest payments made each Oct 1 and April 1. The bonds are issued at 98. Bob's Allen Wrench Company amortizes any premium or discount using the Straight line method
a. Prepare the journal ...

Solution Summary

The solution has accounting questions dealing with inventory calculation using LIFO and FIFO methods, issuance of bonds and treasury shares

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