Problem 5-9

Good Essays
Problems

Page 1 of 10

Taxation of Business
Entities, 2012, eBook
3/e
Content

Chapter5: Corporate Operations

Problems
44. (LO1) LNS corporation reports book income of $2,000,000. Included in the $2,000,000 is $15,000 of taxexempt interest income. LNS reports $1,345,000 in ordinary and necessary business expenses. What is LNS corporation 's taxable income for the year?
45. (LO1) ATW corporation currently uses the FIFO method of accounting for its inventory for book and tax purposes. Its beginning inventory for the current year was $8,000,000. Its ending inventory for the current year was $7,000,000. If ATW had been using the LIFO method of accounting for its inventory, its beginning inventory would have been $7,000,000 and its ending inventory would have been $5,500,000. Assume ATW corporation 's marginal tax rate is 34 percent.
a. How much more in taxes did ATW corporation pay for the current year because it used the FIFO method of accounting for inventory than it would have paid if it had used the LIFO method?
b. Why would ATW use the FIFO method of accounting if doing so causes it to pay more taxes on a present value basis? (Note that the tax laws don 't allow corporations to use the LIFO method of accounting for inventory unless they also use the LIFO method of accounting for inventory for book purposes.) 46. (LO1) ELS corporation is about to begin its sixth year of existence. Assume that ELS reported gross receipts for each of its first five years of existence for Scenarios A, B, and C as follows:

p. 234

a. In what years is ELS allowed to use the cash method of accounting under Scenario A?
b. In what years is ELS allowed to use the cash method of accounting under Scenario B?
c. In what years is ELS allowed to use the cash method of accounting under Scenario C?
47. (LO2) On its year 1 financial statements, Seatax Corporation, an accrual-method taxpayer, reported federal income tax expense of $570,000. On its year 1 tax

You May Also Find These Documents Helpful

  • Good Essays

    Chapter 4 Solutions

    • 3076 Words
    • 13 Pages

    To restate Year 2006 LIFO inventories to a FIFO basis, we use the following analytical entry:…

    • 3076 Words
    • 13 Pages
    Good Essays
  • Good Essays

    Under the inventories footnotes, below the financial statements (page 46), Nash-Finch says that 79% of their inventories are valued with LIFO. The additional 21% is calculated using FIFO. By using LIFO, Nash-Finch is able to report lower holding inventories by $90.7 million for 2012. Being able to report lower inventories lets the company defer holding gains and not pay taxes on that additional amount of inventory. They are also able to post higher cash flows from operating activities, which makes the company look better.…

    • 1034 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Lifo and Fifo

    • 19588 Words
    • 79 Pages

    1.0 INTRODUCTION The statutory mandate in U.S. tax law that firms using the last-in first-out (LIFO) inventory costing method for tax purposes must also use LIFO for financial reporting purposes makes inventory accounting an especially interesting research and teaching topic. The constraint on managerial discretion imposed by tax--book conformity highlights the tension that can exist between tax minimization, on the one hand, and achieving financial reporting objectives, on the other hand. Trade-offs between tax minimization and other objectives are a major theme in the Scholes and Wolfson [1992] framework for examining taxation in the context of business strategy. Moreover, a researcher typically can quantify the cash flow impact a firm derives by using (or forgoes by not using) LIFO or FIFO, whereas quantifying the cash flow effects of other financial accounting choices is more problematic.1 This is because the cash flow effects of other accounting choices typically are indirect (e.g., through contracting costs). It thus is not surprising that research in the LIFO/FIFO area has a long history. Two reviews of LIFO research have previously been published in the Journal of Accounting Literature. The first appeared in the initial issue of the Journal and examined LIFO-related research as part of a more general review of capital market assessments of alternative accounting methods [Ricks, 1982a]. The second review, published just six year later, focused exclusively on LIFO. It surveyed three main research streams: the effect of LIFO adoptions on security prices; the determinants of…

    • 19588 Words
    • 79 Pages
    Powerful Essays
  • Satisfactory Essays

    | The following inventory information above was taken from the records of BlobeKom Ltd.:Historical Cost $12,000Replacement Cost $ 9,000Expected selling price $10,000Expected selling cost $ 500Normal profit margin 10% of selling priceUnder IAS 2, what should the Balance Sheet report for Inventory?Answer…

    • 819 Words
    • 4 Pages
    Satisfactory Essays
  • Good Essays

    LIFO, last-in-first-out and FIFO, first-in-first-out the two most common inventory accounting methods. The choice of the method of inventory accounting by a small business can directly impact its balance sheet, income statement, and statement of cash flows. Not only do companies have to track the number of items sold, but they have to track the cost of each item. These two methods are ways in which they can do that. Each will have a different effect on their financial statements.…

    • 768 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    For example, college sales may not construe into college banknote breeze if accounts receivable are accustomed to rise. (Customers may not pay if appurtenances are delivered, but rather may be invoiced.) Furthermore, banknote may be acclimated to body up inventories, which may abate in amount or even become anachronistic if articles are not awash in a appropriate manner. The costs to body up these inventories are not recorded until articles are in fact sold. Even annual acceptance may alter from close to close if one aggregation uses first-in-first-out (FIFO) accounting and addition uses last-in-first-out (LIFO) accounting.…

    • 3153 Words
    • 10 Pages
    Powerful Essays
  • Good Essays

    Today I spoke with Roberta concerning her request for tax assistance. Roberta wants to know if she can use the specific identification method to calculate the recognized gain of her sale of Color Inc. stock. She received a letter from the IRS stating that she should have used the FIFO method. Therefore, Roberta is looking to find out which method is correct to clear this matter up with the IRS.…

    • 503 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Management: Problem Sets

    • 405 Words
    • 2 Pages

    Ending Inventory 2500 3000 2000 0 Average Inventory 1250 2750 2500 1000 Inventory Cost 7500 16500 15000 6000 45000…

    • 405 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Beginning inventory was pulled from the previous year's ending inventory. Purchases were projected from a trend of 75.61% of sales for the previous 3 years. The total cost of goods sold assumed the previous 3-year average of 71.93% of sales would continue. Provision for income taxes was calculated as 15% for the first $50 income, 25% for the second $25 income, and 34% for above $75 income.…

    • 1797 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    LIFO arguments

    • 941 Words
    • 3 Pages

    Without LIFO, there is a “mismatch between what it’s going to cost us to put inventory back on the shelf and what we bought it for six months ago, when it may have cost less.”…

    • 941 Words
    • 3 Pages
    Good Essays
  • Good Essays

    In 2011, Inventories were the most significant current asset ($8,044 million). The Inventories section of Note 1, Notes to Consolidated Financial Statements, advises Walgreen Co. valued 2011 inventories with the last-in, first-out (LIFO) cost method. Had Walgreen elected to use the first-in, first-out (FIFO) cost basis for the 2011 inventories would have been greater by $1,587 million. GAAP permits companies to select which inventory accounting method they will use to report inventories (LIFO or FIFO). Companies must state the method selected in the financial statement notes. Most companies calculate the value for both methods and select the method with the lower tax liability. For the past couple of decades, costs have risen (inflation). LIFO has been a popular choice as it produces the largest cost of goods sold expense, the greater the expense deduction the lower the taxable income.…

    • 576 Words
    • 3 Pages
    Good Essays
  • Good Essays

    What is the amount of the inventory at the end of the year using the FIFO method?…

    • 2103 Words
    • 14 Pages
    Good Essays
  • Good Essays

    Cost of Goods

    • 332 Words
    • 2 Pages

    A multi-step income statement for a trading business highlights the fact that between 40% and 60% of revenue from sales is accounted for as the cost of goods sold. The cost of goods attributed to a company’s products is expensed as the company sells these goods. There are several ways to calculate COGS but one of the more basic ways is to start with the beginning inventory for the period and add the total amount of purchases made during the period then deducting the ending inventory. (According to Kimmel, Weygandt, and Kieso), cost of goods sold is found by taking the cost of goods available for sale (beginning merchandise inventory + net purchase), less the ending merchandise inventory (p. 244). In a wholesale or retail trading business, merchandise held for resale in the normal course of business is the largest asset owned by the organization. For this reason it is vital that accurate up-to-date records be maintained when goods are acquired and inventories taken. Finished goods and or merchandise makes up cost of goods sold. There are two classifications of inventory: merchandiser or manufacturer. In a merchandiser company inventory consists of many items all different. Whereas, a manufacturer, some inventory may not be ready (Kimmel, Weygandt, & Kieso, p. 282). Examples of items that make up cost of goods include; produce, clothing, electronics, items that can be resold from manufacture to a company to the customer. This means when the business acquires a finished product, the cost of the product goes into an inventory asset account. The customer will then purchase the product, finished good, the business transfers the cost of the product from the inventory asset account to the cost of goods sold expense account because the product is no longer in the business’s inventory (Kimmel, Weygandt, & Kieso, p. 282).…

    • 332 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    Acc 422 E9-1 & E9-12

    • 383 Words
    • 2 Pages

    (b) Determine the inventory by the lower-of-cost-or-market method, applying the method to the total of the inventory. $340,500…

    • 383 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Business Performance

    • 1792 Words
    • 8 Pages

    9. Nutmeg, Inc. uses the LIFO method to account for inventory. During years in which inventory unit costs are generally rising and in which the company purchases more inventory than it sells to customers. What is the impact on gross profit compared with FIFO method?…

    • 1792 Words
    • 8 Pages
    Good Essays