Mini-Project #5 Inventory STUDENT ROLE: You are employed with Johnson Accounting Firm as an entry-level accountant. Today you have been assigned to work with Spare Parts, Inc. to help answer some of their inventory questions. CLIENT PROFILE: Spare Parts, Inc. is a regional retail chain that sells repair parts for vehicles, tractors, and yard equipment. They have been in business since 2010, and are a publicly traded company. Spare Parts, Inc. recently hired a new CEO and he is reviewing the accounting practices related to Inventory. His company currently uses LIFO for tax reporting and financial reporting and wants to understand the impact of switching to FIFO for financial reporting. The company uses a periodic inventory method, and has a 28% tax rate. The client has 80,000 shares of common stock outstanding, with a par value of $0.50 per share. ASSIGNMENT: To help him make this decision, your supervisor has asked you to complete several tasks. In Blackboard you have been provided a PURCHASE AND SALES DATA table, with two scenarios. Under Scenario #1, purchase prices are increasing. In Scenario #2, purchase prices are decreasing. You have also been provided with a Trial Balance for December 31, 2016. All account balances are current and adjusted except for the Inventory account and Cost of Goods Sold, which are at beginning balances. Because the company uses the periodic method, these accounts have not been adjusted yet. SCENARIO #1 CALCULATIONS Task 1: Using the PURCHASE AND SALES DATA table and TRIAL BALANCE for Scenario #1: Apply the FIFO method to calculate Ending Inventory and Cost of Goods Sold for Scenario #1. Show your work in either Excel or Word. Prepare the year-end adjusting entry to record Inventory and Cost of Goods Sold for both scenarios. HINT: Beginning Inventory is $20,000. The PURCHASE account does have a balance, but the company did not have any purchase returns, purchase discounts or freightin. Prepare a Multiple-Step Income Step and a Balance Sheet for both scenarios. The client has a 28% tax rate. Task 2: Using the PURCHASE AND SALES DATA table and TRIAL BALANCE for Scenario #1: Apply the LIFO method to calculate Ending Inventory and Cost of Goods Sold for Scenario #1. Show your work in either Excel or Word. Prepare the year-end adjusting entry to record Inventory and Cost of Goods Sold for both scenarios. HINT: Beginning Inventory is $20,000. The PURCHASE account does have a balance, but the company did not have any purchase returns, purchase discounts or freightin. Prepare a Multiple-Step Income Step and a Balance Sheet for both scenarios. The client has a 28% tax rate. (continue to next page.) SCENARIO #2 CALCULATIONS Task 3: Using the PURCHASE AND SALES DATA table and TRIAL BALANCE for Scenario #2: Apply the FIFO method to calculate Ending Inventory and Cost of Goods Sold for Scenario #2. Show your work in either Excel or Word. Prepare the year-end adjusting entry to record Inventory and Cost of Goods Sold for both scenarios. HINT: Beginning Inventory is $20,000. The PURCHASE account does have a balance, but the company did not have any purchase returns, purchase discounts or freightin. Prepare a Multiple-Step Income Step and a Balance Sheet for both scenarios. The client has a 28% tax rate. Task 4: Using the PURCHASE AND SALES DATA table and TRIAL BALANCE for Scenario #2: Apply the LIFO method to calculate Ending Inventory and Cost of Goods Sold for Scenario #2. Show your work in either Excel or Word. Prepare the year-end adjusting entry to record Inventory and Cost of Goods Sold for both scenarios. HINT: Beginning Inventory is $20,000. The PURCHASE account does have a balance, but the company did not have any purchase returns, purchase discounts or freightin. Prepare a Multiple-Step Income Step and a Balance Sheet for both scenarios. The client has a 28% tax rate. FINAL SUMMARY Task 5: Prepare a memo, in proper format (see Blackboard example), to your supervisor (Sally Sampson) addressing the following topics: (a) When costs are rising, which method (FIFO or LIFO) produces higher net income and why? (b) When costs are decreasing, which method (FIFO or LIFO) produces the highest net income and why? (c) The client has reported that it is confident prices will continue to rise. If client wants to minimize taxable income ON THE TAX RETURN, which method will achieve clients goal? (d) With rising costs, if client wants to MAXIMIZE net income reported on the Income Statement, which method will achieve clients goal. (e) Using the ACCOUNTING TOOLS article called The LIFO conformity rule, explain the LIFO conformity rule. (f) Provide an explanation of how the LIFO conformity rule impacts clients desires to minimize taxable income on the tax return, while maximizing net income on the income statement.

DATE TRANSACTION QUANTITY PRICE/COST 1/1 Beginning Inventory 1,000 $20 4/2 Sale 500 5/1 Purchase 2,000 $23 7/17 Sale 1,400 10/5 Sale 600 11/2 Purchase 1,950 $24 12/8 Sale 1,670 DATE TRANSACTION QUANTITY PRICE/COST 1/1 Beginning Inventory 1,000 $20 4/2 Sale 500 5/1 Purchase 2,000 $18 7/17 Sale 1,400 10/5 Sale 600 11/2 Purchase 1,950 $17 12/8 Sale 1,670 SCENARIO #1 SCENARIO #2 PURCHASE AND SALES DATA

Debit Credit CASH $ 450,000 ACCOUNTS RECEIVABLE 28,000 INVENTORY 20,000 SUPPLIES 12,000 EQUIPMENT 352,000 ACCUMULATED DEPRECIATION-EQUIPMENT $ 10,000 ACCOUNTS PAYABLE 1,000 NOTES PAYABLE (DUE IN 3 YEARS) 5,000 INTEREST PAYABLE 450 SALARIES AND WAGES PAYABLE 4,500 UTILITIES PAYABLE 150 COMMON STOCK 40,000 PAID IN CAPITAL IN EXCESS OF PAR 10,000 RETAINED EARNINGS 48,650 DIVIDENDS 10,000 SALES REVENUE 980,000 PURCHASES 92,800 RENT EXPENSE 16,000 INSURANCE EXPENSE 5,000 INTEREST EXPENSE 250 SALARIES AND WAGES EXPENSE 80,000 SUPPLIES EXPENSE 8,000 UTILITIES EXPENSE 6,000 DEPRECIATION EXPENSE 2,500 PHONE/INTERNET EXPENSE 1,200 ADVERTISING EXPENSE 16,000 $ 1,099,750 $ 1,099,750 SPARE PARTS, INC. Adjusted Trial Balance December 31, 2016 SCENARIO #1

Debit Credit CASH $ 450,000 ACCOUNTS RECEIVABLE 28,000 INVENTORY 20,000 SUPPLIES 12,000 EQUIPMENT 352,000 ACCUMULATED DEPRECIATION-EQUIPMENT $ 10,000 ACCOUNTS PAYABLE 1,000 NOTES PAYABLE (DUE IN 3 YEARS) 5,000 INTEREST PAYABLE 450 SALARIES AND WAGES PAYABLE 4,500 UTILITIES PAYABLE 150 COMMON STOCK 40,000 PAID IN CAPITAL IN EXCESS OF PAR 10,000 RETAINED EARNINGS 25,000 DIVIDENDS 10,000 SALES REVENUE 980,000 PURCHASES 69,150 RENT EXPENSE 16,000 INSURANCE EXPENSE 5,000 INTEREST EXPENSE 250 SALARIES AND WAGES EXPENSE 80,000 SUPPLIES EXPENSE 8,000 UTILITIES EXPENSE 6,000 DEPRECIATION EXPENSE 2,500 PHONE/INTERNET EXPENSE 1,200 ADVERTISING EXPENSE 16,000 $ 1,076,100 $ 1,076,100 SPARE PARTS, INC. Adjusted Trial Balance December 31, 2016 SCENARIO #2