Lewis Corporation is considering switching from FIFO to LIFO to reduce its income tax expense. Assuming a corporate income tax rate of 40%, calculate the tax savings this would have made for 2009 to 2011. Would you recommend that Lewis make this change?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Lewis Corporation is considering switching from FIFO to LIFO to reduce its income tax expense. Assuming a corporate income tax rate of 40%, calculate the tax savings this would have made for 2009 to 2011. Would you recommend that Lewis make this change?

Lewis Corporation had traditionally used the FIFO method of inventory valuation. You are given
the information shown in Exhibit 1 on transactions during the year affecting Lewis's inventory
account. (The purchases are in sequence during the year. The company uses a periodic inventory
method.)
EXHIBIT 1: Inventory Transactions 2009-2011
2009
Beginning balance
1,840
cartons @
$20.00
Purchases
600 cartons @
20.25
cartons
@
21.00
800
400 cartons @
21.25
cartons @
21.50
200
2,820 cartons @
Sales
34.00
Beginning balance
1,020
cartons
Purchases
700 cartons @ 21.50
700 cartons @ 21.50
cartons @ 22.00
700
1,000 cartons @
22.25
Sales
3,080 cartons @
35.75
1,040 cartons
Beginning balance
Purchases
1,000 cartons @
22.50
700 cartons (a)
22.75
700 cartons a
23.00
700 cartons
(a)
23.50
Sales
2,950 cartons
(a)
35.75
2010
2011
Transcribed Image Text:Lewis Corporation had traditionally used the FIFO method of inventory valuation. You are given the information shown in Exhibit 1 on transactions during the year affecting Lewis's inventory account. (The purchases are in sequence during the year. The company uses a periodic inventory method.) EXHIBIT 1: Inventory Transactions 2009-2011 2009 Beginning balance 1,840 cartons @ $20.00 Purchases 600 cartons @ 20.25 cartons @ 21.00 800 400 cartons @ 21.25 cartons @ 21.50 200 2,820 cartons @ Sales 34.00 Beginning balance 1,020 cartons Purchases 700 cartons @ 21.50 700 cartons @ 21.50 cartons @ 22.00 700 1,000 cartons @ 22.25 Sales 3,080 cartons @ 35.75 1,040 cartons Beginning balance Purchases 1,000 cartons @ 22.50 700 cartons (a) 22.75 700 cartons a 23.00 700 cartons (a) 23.50 Sales 2,950 cartons (a) 35.75 2010 2011
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