The accountant at Blackjack Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method.The tax rate is 30% and the FIFO method will result in income before taxes of $3,640.The LIFO method will result in income before taxes of $3,290.What is the difference in tax that would be paid between the two methods?

Question

Quizplus · Accepted Answer

To find the difference in tax that would be paid, we first need to calculate the taxable income for each method. 
For FIFO: 
Taxable Income = Income before taxes - Cost of Goods Sold = $3,640 - COGS 
For LIFO: 
Taxable Income = Income before taxes - Cost of Goods Sold = $3,290 - COGS
Since the only difference between the two methods is the cost of goods sold amount, we can set up the following equation: 
($3,640 - COGS) x 0.3 = ($3,290 - COGS) x 0.3
Simplifying this equation, we can solve for COGS: 
$342 = COGS
Now that we know the cost of goods sold for each method, we can calculate the taxable income and taxes paid:

FIFO: 
Taxable Income = $3,640 - $342 = $3,298 
Taxes = $3,298 x 0.3 = $989.40

LIFO: 
Taxable Income = $3,290 - $342 = $2,948 
Taxes = $2,948 x 0.3 = $884.40

The difference in tax paid between the two methods is: 
$989.40 - $884.40 = $105 
Therefore, the best choice is to use the FIFO method, which results in a higher taxable income and a slightly higher tax paid. This method may be better if the company wants to show higher profits for investors or if they anticipate future tax rate increases.

The Accountant at Blackjack Company Is Figuring Out the Difference