I had to read this and answer A,B,C, my answers are below please let me know if
ID: 2444669 • Letter: I
Question
I had to read this and answer A,B,C, my answers are below please let me know if they are correct and WHY. Or please let me know if they are incorrect and why you feel this way. Thank You
Reagen Wholesale Corp. uses the LIFO cost flow method. In the current year, profit at Reagen is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year’s net income and to take advantage of the changing income tax rate, the president of Reagen Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value.
What is the effect of this transaction on this year’s and next year’s income statement and income tax expense? Why?
If Reagen Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?
Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?
a) The purchase of the inventory will go up for this year and then next year due to the lifo method that inventory will be the first out. It will also make the company pay a lesser amount in taxes.
b) I don't think he would because it would not affect the accounts in his favor.
c) No. Avoiding paying taxes is a huge ethical issue.
Explanation / Answer
a. purchase price and closing stock has same value if there are no sales after purchase. if there are sales after purchase purchase price increases and closing stock decreases there by low profit and low taxes. next year closing stock will become opening stock thereby high profits because of low tax rate less tax will be payable.
b.correct
c. no. it is a tax planning. avoiding means falsification of accounts
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