The Langston Corporation is formed on January 2, 1979, with the issuance at par of 100,000 shares of \(\$ 10\)-par-value common stock for cash. During 1979, the following transactions occur.

(1) The assets of the Dee's Department Store are acquired on January 2, 1979, for \(\$ 800,000\) cash. The market values of the identifiable assets received are as follows: accounts receivable, \(\$ 200,000\); merchandise inventory, \(\$ 400,000\) ( 200,000 units); store equipment, \(\$ 150,000\). The acquisition is accounted for as a purchase.

(2) Merchandise inventory is purchased during 1979 as follows

(3) During the year, 210,000 units are sold at an average price of \(\$ 3.20\)
(4) Extensive training programs are held during the year to acquaint previous employees of Dee's Department Store with the merchandising policies and procedures of Langston Corporation. The costs incurred in the training programs total \(\$ 50,000\).
(5) Selling, general, and administrative costs incurred and recognized as an expense during 1979 are \(\$ 80,000\).
(6) The store equipment is estimated to have a 5 -year useful life and zero salvage value.
(7) The income tax rate is 20 percent of the first \(\$ 25,000\) of taxable income, 22 percent of the next \(\$ 25,000\), and 48 percent of the remainder. Goodwill arising from a corporate acquisition is not deductible in determining taxable income. Ignore investment tax credit provisions in this problem.
The management of Langston Corporation is uncertain about the accounting methods that should be used in preparing its financial statements. The choice has been narrowed to two sets of accounting methods, and you have been asked to determine net income for 1979 using each set.

a Set A consists of the following accounting methods (for book and tax purposes): LIFO inventory cost-flow assumption, double-declining-balance depreciation method, immediate expensing of the costs of the training program, amortization of goodwill over 10 years.
b Set \(\mathrm{B}\) consists of the following accounting methods: FIFO inventory-costing assumption, straight-line depreciation for book and double-declining-balance for tax purposes, capitalization and amortization of the costs of the training program over 5 years for book and immediate expensing for tax purposes, amortization of goodwill over 40 years.

Transcribed Image Text:

Date April 1 Units Purchased Unit Price Cost of Purchase 30,000 $2.10 $ 63,000 August 1 20,000 2.20 October 1 Total 50,000 2.40 100,000 44,000 120,000 $227,000