A company engaged in the manufacture and sale of dental supplies maintained an inventory of gold for use in its business. The company used LIFO for the gold content of its products. On the final day of its fiscal year, the company bought 10,000 ounces of gold at $1,600 per ounce. Had the purchase not been made, the company would have penetrated its LIFO layers for 8,000 ounces of gold acquired at $750 per ounce.
The applicable income tax rate is 40%.
1. Compute the effect of the year-end purchase on the income taxes of the fiscal year.
2. On the second day of the next fiscal year, the company resold the 10,000 ounces of gold to its suppliers. What do you think the IRS should do if it discovers this resale? Explain.