Chapter 7, Problem 6SDC

Critical Thinking: Income Manipulation under the LIFO Inventory Method

Mandalay Industries is a private company that sells electronic test equipment. During the year, the inventory records reflected the following:

To minimize income taxes, inventory is valued at cost using the LIFO inventory method. On December 28, Mandalay’s supplier increased the unit cost of new test equipment to $15,000.

Required:

1. 1. Determine the company’s Income from Operations and the cost of ending inventory. The company’s operating expenses (excluding Cost of Goods Sold) were $300,000 and the company applies LIFO with a periodic inventory system.
2. 2. Mandalay’s management is considering buying 20 additional units on December 31 at $15,000 each. Redo the income statement and ending inventory calculations, assuming that this purchase is made on December 31.
3. 3. How much did Income from Operations change because of the decision to purchase additional units on December 31? Is there any evidence of deliberate income manipulation? Is this tax fraud? Explain.