Crow Corporation Has Used the LIFO Inventory Method for the Past

question 107

Multiple Choice

Crow Corporation has used the LIFO inventory method for the past 10 years. During that time, the prices Crow pays for the inventory have increased by 50%. Its inventory value when it first adopted LIFO was $5,000,000. The company began using a just-in-time inventory system the same year it adopted LIFO, and although sales have increased, the quantities of goods on hand at year end has not changed in the past ten years. The corporation's marginal tax rate has been 35% in all of the years. As a result of the LIFO election:

• A)The company has deferred $5,000,000 of income tax.
• B)The company has deferred $1,750,000 ($5,000,000 × .35) of income tax.
• C)The LIFO election did not defer any income tax because the quantity of goods on hand has not changed.
• D)The company has deferred $875,000 [(.50)($5,000,000)(.35)] of income tax.
• E)None of the above.

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Definitions:

Inventories

Inventories consist of raw materials, work-in-progress, and finished goods held by a company during the production and sales process, awaiting sale.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including the cost of the materials and labor directly involved in creating the product.

Cash Dividends

Payments made by a corporation to its shareholder members out of its earnings. It represents a share of corporate profits.

Property, Plant, Equipment

Long-term tangible assets used in the operation of a business and not intended for resale.