Holliday Company's inventory records show the following data: A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for ₤3 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. Under the LIFO method, cost of goods sold is
A) ₤2,625.
B) ₤4,500.
C) ₤21,000.
D) ₤22,000.

Question

Holliday Company's inventory records show the following data:  A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for ₤3 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. Under the LIFO method, cost of goods sold is
A) ₤2,625. 
B) ₤4,500. 
C) ₤21,000. 
D) ₤22,000.

Quizplus · Accepted Answer

Using the LIFO method, the cost of goods sold is calculated by assuming that the last units purchased are the first ones sold. Therefore, the cost of the 2,000 units sold is calculated as follows:

- 600 units @ ₤1 = ₤600
- 1,000 units @ ₤2.50 = ₤2,500
- 400 units @ ₤2.80 = ₤1,120

Total cost of goods sold = ₤4,220

Since the company has an effective tax rate of 20%, the tax expense is calculated as 20% of the before-tax income, which is the revenue minus the cost of goods sold. Therefore, the tax expense is:

Tax expense = 20% x (2,000 x ₤3 - ₤4,220) = ₤156

Thus, the after-tax income is:

After-tax income = (2,000 x ₤3 - ₤4,220) - ₤156 = ₤4,624

Therefore, the correct answer is C) ₤21,000.

Holliday Company's Inventory Records Show the Following Data: a Physical