Reagen Wholesale Corp. uses the LIFO cost flow method. In the current year, profit at Reagen is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year’s net income and to take advantage of the changing income tax rate, the president of Reagen Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery
3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value.
Instructions
(a) What is the effect of this transaction on this year’s and next year’s income statement and income tax expense? Why?
(b) If Reagen Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?
(c) Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?