Question

3. Allen company uses LIFO for financial reporting purposes and FIFO for internal reporting purposes. Its LIFO reserve balance is $80,000 as of 12/31/2020 and $90,000 as of 12/31/2021. Its reported net income (LIFO) is $500,000 for fiscal year 2021 and Cost of Goods Sold for 2021 is 1,000,000. Assume tax rate is 40%, what would the company's 2021 net income and cost of goods sold be should the company used FIFO method?

Answer 1

Step-by-step explanation:

To calculate the company's net income and cost of goods sold (COGS) using the FIFO method, we need to adjust for the change in the LIFO reserve.

Given data:

LIFO reserve balance as of 12/31/2020 = $80,000

LIFO reserve balance as of 12/31/2021 = $90,000

Reported net income (LIFO) for fiscal year 2021 = $500,000

Cost of Goods Sold (COGS) for 2021 = $1,000,000

Tax rate = 40%

First, let's calculate the LIFO effect, which is the change in the LIFO reserve:

LIFO effect = LIFO reserve balance as of 12/31/2021 - LIFO reserve balance as of 12/31/2020

= $90,000 - $80,000

= $10,000

To calculate the FIFO COGS, we need to add the LIFO effect to the reported COGS:

FIFO COGS = COGS + LIFO effect

= $1,000,000 + $10,000

= $1,010,000

Now, let's calculate the FIFO net income. We need to adjust the reported net income by subtracting the tax on the LIFO effect and adding the LIFO effect:

Tax on LIFO effect = LIFO effect * tax rate

= $10,000 * 0.40

= $4,000

FIFO net income = Reported net income (LIFO) - Tax on LIFO effect + LIFO effect

= $500,000 - $4,000 + $10,000

= $506,000

Therefore, if the company used the FIFO method, the net income for 2021 would be $506,000, and the cost of goods sold would be $1,010,000.