Johnson Ltd. began operations on January l, 2019. Merchandise purchases and four alternative methods of valuing inventory for the first two years of operations are summarized below:
$$\begin{array} { | l | r | r | }
\hline \text { Purchases } & 2019 & 2020 \
\hline \text { Ending inventory } & \$ 700,000 & \$ 850,000 \
\hline - \text { Specific identification } & & \
\hline \text { - FIFO } & 210,000 & 203,000 \
\hline \text { - Average cost } & 238,000 & 188,000 \
\hline - \text { Lower of cost and market } & 224,000 & 189,000 \
\hline
\end{array}$$ Required:
a. Which of the four methods listed above does not apply the matching principle? Briefly explain.
b. Determine the cost flow assumption or inventory valuation method that would report the highest net income for 2019.
c. Assuming that FIFO had been used for both years, how much would the cost of goods sold be for 2020?

Question

Johnson Ltd. began operations on January l, 2019. Merchandise purchases and four alternative methods of valuing inventory for the first two years of operations are summarized below:
 $$\begin{array} { | l | r | r | } 
\hline \text { Purchases } & 2019 & 2020 \
\hline \text { Ending inventory } & \$ 700,000 & \$ 850,000 \
\hline - \text { Specific identification } & & \
\hline \text { - FIFO } & 210,000 & 203,000 \
\hline \text { - Average cost } & 238,000 & 188,000 \
\hline - \text { Lower of cost and market } & 224,000 & 189,000 \
\hline
\end{array}$$ Required:
a. Which of the four methods listed above does not apply the matching principle? Briefly explain.
b. Determine the cost flow assumption or inventory valuation method that would report the highest net income for 2019.
c. Assuming that FIFO had been used for both years, how much would the cost of goods sold be for 2020?

Quizplus · Accepted Answer

The Answer of Johnson Ltd. began operations on January l, 2019. Merchandise purchases and four alternative methods of valuing inventory for the first two years of operations are summarized below:
 $$\begin{array} { | l | r | r | } 
\hline \text { Purchases } & 2019 & 2020 \
\hline \text { Ending inventory } & \$ 700,000 & \$ 850,000 \
\hline - \text { Specific identification } & & \
\hline \text { - FIFO } & 210,000 & 203,000 \
\hline \text { - Average cost } & 238,000 & 188,000 \
\hline - \text { Lower of cost and market } & 224,000 & 189,000 \
\hline
\end{array}$$ Required:
a. Which of the four methods listed above does not apply the matching principle? Briefly explain.
b. Determine the cost flow assumption or inventory valuation method that would report the highest net income for 2019.
c. Assuming that FIFO had been used for both years, how much would the cost of goods sold be for 2020?

Johnson Ltd Required: A

Johnson Ltd Required:
A