Lunar Company uses a periodic inventory system. The company's accounting records provided the following information for Product 2 :

Required:
1. Prepare an income statement for 2011 , through pretax profit, showing the detailed computation of cost of sales for two cases:

a. Case A-FIFO

b. Case B-Weighted average For each case, show the computation of the ending inventory. (Hint: Set up adjacent columns, one for each case.)
2. Compare the pretax profit and the ending inventory amounts between the two cases. Explain the similarities and differences.
3. Which inventory costing method may be preferred for income tax purposes? Explain.
4. Prepare journal entries to record transactions

(b) through (e), as well as the cost of sales at December 31, 2011, assuming that Lunar uses FIFO for inventory costing.

Transcribed Image Text:

Transactions Units Unit Cost a. Inventory, December 31, 2010 3,000 $12 For the year 2011: b. Purchase, April 11 9,000 10 c. Sale, May 1 ($30 each) 5,000 d. Purchase, June 1 a. Sale, July 3 ($30 each) 8,000 13 6,000 f. Operating expenses (excluding income tax expense), $85,000