Sea Travel sells motor boats. One of Sea Travel’s most popular models is the Wing. During the current year, Sea Travel purchased 12 of these boats at the following costs:

On April 28, Sea Travel sold five Wings to the Jack Sport racing team. The remaining seven boats remained in inventory at June 30, the end of Sea Travel’s fiscal year.

Instructions

a. Compute (a) the cost of goods sold relating to the sale on April 28 and (b) the ending inventory of Wing boats at June 30, using the following cost flow assumptions:

1. Average cost (round cost to nearest whole dollar).

2. FIFO.

3. LIFO.

Show the number of units and the unit costs of each layer comprising the cost of goods sold and ending inventory.

b. Using the cost figures computed in part a, answer the following questions:

1. Which of the three cost flow assumptions will result in Sea Travel reporting the lowest net income for the current year? Would this always be the case? Explain.

2. Which of the three cost flow assumptions will result in the highest income tax expense for the year? Would you expect this usually to be the case? Explain.

3. May Sea Travel use the cost flow assumption that results in the lowest net income for the current year in its financial statements, but use the cost flow assumption that maximizes taxable income for the current year in its income tax return? Explain.

Transcribed Image Text:

Units Unit Total Purchased os Cost Purchase Date Apr. 1 Apr. 19. 4 $8,000 $32,000 8,200 41,000 8,500 25,500 $98,500 May 8 3 12