Holliday Company's inventory records show the following dа ta:

Units Unit Cost

Inventory, January 1 5,000 $9.00

Purchases: June 18 4,500 8.00

November 8 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for $12 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. What is the difference in taxes if LIFO rather than FIFO is used?

$800 additional taxes

$4,000 additional taxes

$3,200 tax savings

$4,000 tax savings

The correct answer is A.

Explanation:

Giving the following information:

Inventory:

January 1: 5,000 units $9.00

Purchases:

June 18: 4,500 units $8.00

November 8: 3,000 units $7.00

A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for $12 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method.

Units sold = 10,500

FIFO:

COGS = 5,000*9 + 4,500*8 + 1,000*7 = 88,000

Sales = 12*10,500 = 126,000

COGS = (88,000)

Gross profit = 38,000

Tax = 38,000*0.2 = (7,600)

Net operating income = 30,400

LIFO:

COGS = 3,000*7 + 4,500*8 + 3,000*9 = 84,000

Sales = 12*10,500 = 126,000

COGS = (84,000)

Gross profit = 42,000

Tax = 42,000*0.2 = (8,400)

Net operating income = 33,600

Tax difference = LIFO - FIFO = 8400 - 7600 = $800