Mandalay Industries is a private company that sells electronic test equipment. During the year 2013, the inventory records reflected the following:
Units Unit Cost Total Cost
Beginning Inventory.......... 15..................... $12,000........... $180,000
Purchases....................... 40...................... 10,000.............. 400,000
Sales (45 units at $25,000 each)
To minimize income taxes, inventory is valued at cost using the LIFO inventory method. On
December 28, 2013, Mandalay's supplier increased the unit cost of new test equipment to $15,000.
Required:
1. Determine the company's Income from Operations and the cost of ending inventory. The company's operating expenses (excluding Cost of Goods Sold) were $300,000 and the company applies LIFO with a periodic inventory system.
2. Mandalay's management is considering buying 20 additional units on December 31, 2013, at $15,000 each. Redo the income statement and ending inventory calculations, assuming that this purchase is made on December 31, 2013.
3. How much did Income from Operations change because of the decision to purchase additional units on December 31, 2013? Is there any evidence of deliberate income manipulation? Is this tax fraud? Explain.