Posted: July 26th, 2016

Which method would you recommend to Stewart for tax and financial reporting purposes?

Selling, administrative, and depreciate expenses for the month were $16,000. Stewart’s tax rate is 30 percent.

1. Calculate the cost of ending inventory and the cost of goods sold under each of the following methods:
a. First-in, first-out
b. Last-in, first out
c. Weighted average

2. Based on your answers in requirement (1)
a. What is the gross profit percentage under the FIFO method?
b. What is the net income under the LIFO method?
c. Which method would you recommend to Stewart for tax and financial reporting purposes? Explain your recommendation.

3. Stewart applied the lower cost of market method to value its inventory for reporting purposes at the end of the month. Assuming Stewart used the FIFO method and that inventory had a market replacement value of $19.50 per unit, what would Stewart report on the balance sheet for inventory? Why?

Case E. Matson Company purchased the following on January 1, 2011:

Office equipment at a cost of $50,000 with an estimated useful life to the company of three years and a residual value of $15,000. The company uses the double-declining-balance method of depreciation for the equipment.
Factory equipment at an invoice price of $820,000 plus shipping costs of $20,000. The equipment has an estimated useful life of 100,000 hours and no residual value. The company uses the units-of-production method of depreciation for the equipment.
A patent at a cost of $300,000 with an estimated useful life of 15 years. The company uses the straight-line method of amortization for intangible assets with no residual value.

1. Prepare a partial depreciation schedule for 2011, 2012, and 2013 for the following assets (round your answers to the nearest dollar):
a. Office equipment
b. Factory equipment. The company used the equipment for 8,000 hours in 2011, 9,200 hours in 2012, and 8,900 hours in 2013.