The purchase schedule for Lumbermans and Associates is provided below. (The financial statement Date Items Cost and income tax effects Purchased per 1 of averaging, FIFO, March 15 6,000 $1.30 and LIFO) July 30 9,000 1.50 December 17 7,000 1.60 Total 22,000 The inventory balance as of the beginning of the year was $15,000 (15,000 units @ $1), and an inventory count at year-end indicated that 11,000 items were on hand. The company uses the periodic inventory method. Sales and expenses (excluding Cost of Goods Sold) totaled $55,000 and $15,000, respectively. The federal income tax rate is 30 percent of taxable income. REQUIRED:

a. Prepare three income statements, one under each of the assumptions: FIFO, averaging, and LIFO.

b. How many tax dollars would be saved by using LIFO instead of FIFO?

c. Assume that the market value of an inventory item dropped to $1.35 as of year-end. Apply the lower-of-cost-or-market rule, and provide the appropriate journal entry (if necessary) under the FIFO, averaging, and LIFO assumptions.

d. Repeat

(a) above assuming that the costs per item were as follows. ) Beginning inventory $1.60 March 15 1.40 July 30 1.30 December 17 1.20 Which of the three assumptions gives rise to the highest net income and ending inventory amounts now? Why?