Question

The M. J. Chan Corporation is nearing the end of its first year in business. The following purchases of its single product have been made:


Sales for the year will be 5,000 units for $120,000. Expenses other than cost of goods sold will be $31,000.
The president is undecided about whether to adopt FIFO or LIFO for income tax purposes. The company has ample storage space for up to 7,000 units of inventory. Inventory prices are expected to stay at $15 per unit for the next few months.
1. What would be the net income before taxes, the income taxes, and the net income after taxes for the year under?
(a) FIFO,
(b) LIFO? Income tax rates are 40%.
2. If the company sells its year-1 year-end inventory in year 2 @ $25 per unit and goes out of business, what would be the net income before taxes, the income taxes, and the net income after taxes under?
(a) FIFO,
(b) LIFO? Assume that other expenses in year 2 are $30,000.
3. Repeat requirements 1 and 2, assuming that the 4,000 units @ $15 purchased in December were not purchased until January of the second year and were then sold in year 2. Generalize on the effect on net income of the timing of purchases under FIFO andLIFO.


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  • CreatedFebruary 20, 2015
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