Acct Homework

In 2010 the Moncrief Company purchased from Jim Lester the right to be the sole distributor in the western states of a product called Zelenex. In payment, Moncrief agreed to pay Lester 20% of the gross profit recognized from the sale of Zelenex in 2011.

If Moncrief purchases the additional units at year end under a periodic LIFO inventory system, Moncrief reduces Jim Lester's payment by $40,000 ($210,000 – $170,000) and decreases gross profit by $200,000 ($1,050,000 – $850,000). The net effect on before-tax income is a decrease of $160,000 ($200,000 – $40,000). Since Moncrief does not intend to sell the units until 2004, the only logical reason for purchasing more costly inventory at year-end is profit manipulation.