Question

Lent Corporation converts to S corporation status in 2018. Lent had been using the LIFO inventory method and held a LIFO inventory value of 510,000 (FIFO value of650,000). How much tax must be added to the C corporation tax liability for the year before the S election in 2019?

1) $140,000
2) $7,350
3) $29,400
4) $0

Answer 1

When a corporation converts to an S corporation, it must adjust its inventory from LIFO to FIFO. The tax to be added to the C corporation tax liability is option 1) $140,000.

Step-by-step explanation:

When a corporation converts to an S corporation, it is required to adjust its inventory from the LIFO (Last-In, First-Out) method to the FIFO (First-In, First-Out) method. This is because the LIFO method is not allowed for S corporations. In this case, Lent Corporation had a LIFO inventory value of $510,000 and a FIFO inventory value of $650,000.

To determine the tax to be added to the C corporation tax liability for the year before the S election in 2019, you need to calculate the LIFO recapture amount, which is the difference between the LIFO and FIFO values.

LIFO recapture amount = FIFO inventory value - LIFO inventory value
= $650,000 - $510,000
= $140,000

Therefore, the tax to be added to the C corporation tax liability is $140,000.