Selected information from Jenna Company 2007 annual report (December 31 year-end

Question

Selected information from Jenna Company 2007 annual report (December 31 year-end) is shown below: 2007 2006 S100,000 S 80,000 760,000 580.000 Inventories Cost of Goods Sold Inventories (footnote) Inventories are valued by the last in, first out (LIFO) method. Jenna has used LIFO since 1960. The excess of current cost over the amount stated for inventories valued by the LIFO method amounted to approximately $20,000 at December 31, 2007 and S16,000 at December 31, 2006 respectively. Assuming a 40% income tax rate, the total amount saved in income taxes since Jenna Company started using LIFO s A. $36,000. B.$14,400 C$8.000 D. $6.400.

Explanation / Answer

As inventory is valued at lower than its cost (i.e. by LIFO method), there will be a saving in income tax upto excess amount of current cost which exceeds the amount stated for closing inventory valued by the LIFO method but there will be an extra charge for income tax for excess amount of current cost in beginning inventory.

Saving in income tax for 2016 = Excess amount for Closing Inventory*Tax rate

= $16,000*40% = $6,400

Saving in income tax for 2017 = (Excess closing inventory*tax rate)-(Beginning inventory*tax rate)

= ($20,000*40%) - ($16,000*40%) = $8,000 - $6,400 = $1,600

Total tax saving in income taxes for both years = $6,400+$1,600 = $8,000

Therefore the correct answer is C) $8,000.

  

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