Esquire Inc. uses the LIFO method to report its inventory. Inventory at January 1, 2021, was $950,000 (38,000 units at $25 each). During 2021, 116,000 units were purchased, all at the same price of $30 per unit. 120,000 units were sold during 2021. Assuming an income tax rate of 25%, what is LIFO liquidation profit or loss that the company would report in a disclosure note accompanying its financial statements?

The company would report in a disclosure note accompanying its financial statements:

Lifo assigns an amount to cost of goods sold on the income statement that approximates its current cost; it also better matches current costs with revenues in computing gross profit.

Explanation:

Lifo assigns the highest amount to cost of goods sold - yielding the lowest gross profit and net income which also yields a temporary tax advantage by postponing payment of some income tax.

The tax of LIFO method would be $ 42,500 than the tax of FIFO method.

January 1, 2021  Inventory  ,  $950,000 (38,000 units at $25 each)

Purchases 116,000 units   $30 per unit = $ 3480,000

Sales  120,000

LIFO Ending Inventory 34,000 units at $ 25 = $ 850,000

LIFO Cost of Goods Sold = $ 3480,000+ $950,000-$ 850,000= $ 3580,000

If FIFO was used the ending Inventory would be  34,000 units at $ 30

= $ 1020,000

And FIFO Cost of Goods Sold =  $ 3480,000+ $950,000-$ 1020,000=

$ 3410,000.

There would be difference of $ 170,000 in the LIFO and FIFO Cost of goods sold. The LIFO COGS is $ 170,000 more than FIFO COGS .

That difference would also be in the income LIFO method. The income of LIFO would be $ 170,000 less therefore having ($ 170,000* 25%)  $ 42,500 less income tax.

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