Copy Center sells laser printers and supplies. Watson Copy Center started the ye

Question

Copy Center sells laser printers and supplies. Watson Copy Center started the year with 90 containers of ink (average cost of $ 8.50 each, FIFO cost of $ 8.90 each, LIFO cost of $ 7.80 each). During the year, Watson Copy Center purchased 720 containers of ink at $ 10.30 and sold 600 units for $ 19.75 each. Watson Copy Center paid operating expenses throughout the year, a total of $ 5000. Watson Copy Center's income statementlong dashexcluding the effects of income tax under each of the average-cost, FIFO, and LIFO inventory costing methods--is given.

Watson Copy Center sells laser printers and supplies. Watson Copy Center started the year with 90 containers of ink (average cost of $8.50 each, FIFO cost of $8.90 each, LIFO Cost of S7.80 each). During the year, Watson Copy Center purchased 720 containers of ink at $10.30 and sold 600 units for $19.75 cach. Watson Copy Center paid operating expenses throughout the year, a total of $5,000. Watson Copy Center's income statement excluding the effects of income tax under each of the average-cost, FIFO, and LIFO inventory costing methods— is given. 8 (Click the icon to view the income statement.) Watson Copy Center is a corporation subject to a 25% income tax. Compute Watson Copy Center's income tax expense under the average, FIFO, and LIFO inventory costing methods. Which method would you select to (a) Triaximize income before tax and (b) minirrnize income tax expense? (Round your answer to the nearest whole dollar.) Watson Copy Center Income Statement Year Ended December 31 Average Cost 11,850 $ 6,060 FIFO LIFO 11,850 $11,850 6,054 6,180 Sales revenue Cost of goods sold Gross profit Operating expenses Net income before tax $ 5,790 5,000 5,795 $ 5,670 5,000 5,000 796 $ 670 790 $ Income tax expense

Explanation / Answer

Compute Watson Copy Center's income tax expense under each costing method as follows:

(a) Income before tax is highest under FIFO costing method. Therefore, FIFO costing method should be selected to maximise income before tax.

(b) Income tax expense is lowest under LIFO costing method. Therefore, LIFO costing method should be selected to minimize income tax expense.

Average Cost FIFO LIFO Net income before tax (A) 790.00 796.00 670.00 Income tax rate (B) 25.00% 25.00% 25.00% Income tax expense (A x B) 197.50 199.00 167.50

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