Question

The Kay company currently uses FIFO for inventory valuation. Their records for year ended June 30,2007 reflected:

July 1, 2006 inv 100,000 units at $7.50

Purchases during the year 400,000 units at 8.00

Sales during the year 350,000 units at $15

Expenses exclusive of income tax 1,290,000

cash balance on June 30,2006 250,000

income tax rate: 45%

The use of the LIFO method will result in an approximate tax expense for fiscal 2007 of:

Answer 1

Solution:

Tax expense for fiscal year 2007 is $ 522,000

Kay Company
Income statement
For the Year Ended June 30, 2007
Sales [350000*15]	$                  5,250,000
Cost of goods sold [350000*8]	$                (2,800,000)
Gross profit	$                  2,450,000
Expenses	$                (1,290,000)
Income before taxes	$                  1,160,000
Income Tax @ 45% [1,160,000*45/100]	$                      522,000

Notes:

1) Under LIFO, for cost of goods sold purposes we will consider those purchases which are made recently rather than old stock.