Accounting -LIFO Liquidation Profit – The Hammond Company adopted LIFO

| January 31, 2017

Question
LIFO Liquidation Profit – The Hammond Company adopted LIFO when it was formed on January 1, 2005. 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

2005

10,000

$5

8,000

$12

2006

12,000

6

9,000

13

2007

15,000

8

14,000

16

In December 2008, 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 2008, 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 2008, how much LIFO liquidation profit will it report?

2. Prepare the appropriate annual report disclosures for 2008.

3. If the company purchases an additional 7,000 units in December 2008, 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?

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