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:

Tax Rate

The percentage at which an individual or corporation is taxed by the government.

Net Present Value

The calculation of the present value of an investment's expected cash inflows minus the initial investment cost, used to analyze the profitability of a project.

Depreciation Schedule

A document that outlines the reduction in value of an asset over time and how it is allocated as an expense across accounting periods for tax and accounting purposes.

After-Tax Hurdle Rate

The minimum acceptable rate of return on an investment after accounting for taxes, used in capital budgeting to evaluate projects.