Johnson Corporation began 2018 with inventory of 17,000 units of its only product. The units cost $9 each. The company uses a periodic inventory system and the LIFO cost method. The following transactions occurred during 2018:

Purchased 85,000 additional units at a cost of $10 per unit. Terms of the purchases were 2/10, n/30, and 100% of the purchases were paid for within the 10-day discount period. The company uses the gross method to record purchase discounts. The merchandise was purchased f. o.b. shipping point and freight charges of $0.40 per unit were paid by Johnson.

1,700 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $0.40 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.

Sales for the year totaled 80,000 units at $18 per unit.

On December 28, 2018, Johnson purchased 5,700 additional units at $10 each. The goods were shipped f. o.b. destination and arrived at Johnson's warehouse on January 4, 2019.

20,300 units were on hand at the end of 2018.

Required:

1. Complete the below table to determine the ending inventory and cost of goods sold for 2018.

2. Assuming that operating expenses other than those indicated in the above transactions amounted to $164,000, determine income before income taxes for 2018.

A.

Beginning inventory = 17,000 units

2018 Purchases = (85,000 - 1,700 - 80,000) = 3,300 units

Ending inventory = 20,300 units

Beginning inventory = $153,000

Add: Net Purchases = ($850,000 + $34,000 - $17,000 - $17,000 - $680) = $849,320

Cost of goods available for sales = $1,002,320

Less Ending inventory = [($849,320 + $153,000 - ($10.20 x 80,000 units sold)] = $186,320

Cost of Goods sold = $816,000.

Note: The net cost of purchases is calculated as Purchases + Freight In – Cash Discounts – Purchases Returns and allowance

Note: Net purchases cost per unit is $849,320 divided by 83,300 units = $10.20

B.

Sales = $1,440,000

Deduct: Cost of goods sold = $816,000

Gross Profit = $624,000

Deduct: Operating expense = $164,000

Income before tax = $460,000

Explanation:

Johnsons company

The periodic inventory method is an inventory method that allows a business update its inventory position only after a physical count. Until a physical count is done, all purchases are entered in an Asset Account (named Purchases) and when a physical count is conducted the balance is transferred to the inventory opening balance.

LIFO indicates how we utilize our stocks. Last in first out: meaning the last stock to be purchased should be the first introduced into the production process or sold out.

Opening inventory = 17,000 units x $9 = $153,000

Purchases Account

First purchase of 85,000 units.

Debit Purchases Account with $850,000

Credit Account Payable with $850,000

(Being Cost of materials purchased)

Purchases (1) 85,000 x $10 = $850,000

Freight Account

First purchase of 85,000 units.

Debit Freight Account with $34,000

Credit Account Payable with $34,000

(Being freight charge on stock purchased)

Cash discount.

Exercise of the credit terms of the purchases : 2/10, n/30

Debit Account Payable with $850,000

Credit Cash with $833,000

Credit Cash discount with $17,000

(Being net payment of materials within the 10 days early payment terms)

Purchases Returns

1,700 defective stock were returned & freight cost credited

Dr. Accounts Payable with $17,000 Dr. Accounts Payable with $680

Cr. Purchases returns Account with $17,000

Cr. Freight Cost with $680

Purchases returns (1) -1,700 x $10 = -$17,000

Sales Account

80,000 units at $18

Dr. Cash with $1,440,000

Cr. Sales with $1,440,000

(Being sales in the period)

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