LIFO Liquidation Profit
Response to the following problem:
The Hammond Company adopted LIFO when it was formed on January 1, 2008. Since then, the company has had the following purchases and sales of its single inventory item:
|
Year
|
Units Purchased
|
Cost per Unit
|
Units Sold
|
Price per Unit
|
|
2008
|
10,000
|
$5
|
8,000
|
$ 12
|
|
2009
|
12,000
|
6
|
9,000
|
13
|
|
2010
|
15,000
|
8
|
14,000
|
16
|
In December 2011, the controller realized that because of an unexpected increase in demand, the company had sold 22,000 units but had purchased only 19,000 units during the year. In 2011, each unit had been sold for $19, and each unit purchased had cost $10. The income tax rate is 30%.
Required
1. If the company makes no additional purchases in 2011, how much LIFO liquidation profit will it report?
2. Prepare the appropriate annual report disclosures for 2011.
3. If the company purchases an additional 7,000 units in December 2011, how much income tax will the company save?
4. If the company purchases the additional 7,000 units, how much income tax has the company saved over the four-year period by using LIFO instead of the FIFO cost flow assumption?