In the early 1980s, the American steel industry was experiencing severe financial troubles. An increase in foreign
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USA Steel Co. had the following LIFO inventory layers on January 1, 1982:
Layer 1 (oldest) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 tons @ $10 per ton
Layer 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 tons @ $15 per ton
Layer 3 (newest) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 tons @ $25 per ton
Assume steel sold for $50 per ton in 1983 and cost $35 per ton to produce. Because of a decrease in demand for domestic steel, USA Steel shut down its production facilities and elected to sell the inventory on hand rather than produce additional inventory.
1. If USA Steel Co. sold 15,000 tons of steel during 1983, what was the gross margin in this simplified example using LIFO?
2. What was USA Steel’s gross margin if the 15,000 tons of steel had been calculated at the current cost of $35 per ton?
3. Does the LIFO gross margin accurately depict the financial situation of USA Steel Co.?
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Related Book For
Intermediate Accounting
ISBN: 978-0324312140
16th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
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