IS Exercise 3 (LO 2, 3) Cost of goods sold and tax expense in interim periods. Gran- ger Supply, Inc., has two main areas of inventory, industrial supplies and industrial cleaning equipment. The FIFO inventory method is used for industrial supplies, and the LIFO method used for the cleaning equipment. Prior to considering special interim reporting modifications for LIFO liquidations and lower of cost or market, the company reported the following results for the first two quarters of the current year: Net sales. Cost of sales-industrial supplies Cost of sales-cleaning equipment. Quarter 1. Quarter 2 $9,000,000 Gross profit Selling, general, and administrative. Income before taxes $12,000,000 4,300,000 4,700,000 3,000,000 3,200,000 $ 4,700,000 $1,100,000 2,100,000 $ 2,600,000 1,800,000 $ (700,000) During the first quarter, the company experienced unprecedented demand for its cleaning equipment and as a result liquidated a significant portion of its beginning inventory of equip- ment. The cost of sales-cleaning equipment is based on the historical cost of the liquidated layers. Management anticipates that 400 units of beginning inventory that were included in cost of sales at $1,500 per unit will be replaced during the year and remain in ending inventory at a 20 cost of $2,700 per unit. The cost of sales-industrial supplies does not reflect the fact that the ending inventory of supplies has a fair value of $120,000 less than FIFO cost. During the second quarter, the market for industrial supplies strengthened and the inven- tory of industrial supplies at the end of the second quarter had a fair value of only $25,000 less than FIFO cost. Interim income tax expense is based on the following estimates: Statutory tax rate Projected income before taxes for the balance of the year Annual deductions permanently disallowed for tax purposes Estimated annual tax credits... At End of Quarter 1 At End of Quarter 2 $5,100,000 35% 35% $ 60,000 $ $4,000,000 35,000 $ 18,000 $ 30,000 Prepare an income statement for each of the first two quarters of the current year. All support- ing schedules should be in good form.