Mock Corporation converts to S corporation status in 2018.Mock used the LIFO inventory method in 2017 and had a LIFO inventory of $435,000 (FIFO value of $550,000) on the date of the S election.How much tax must be added to Mock's 2017 corporate tax liability,assuming that Mock is subject to a 35% tax rate.

Question

Quizplus · Accepted Answer

In order to make the S election, the company must recognize in income the difference between the LIFO and FIFO inventory values on the date of the S election. The difference between LIFO and FIFO values is $115,000 ($550,000 – $435,000). At the 35% corporate tax rate, the tax liability will be $40,250 ($115,000 x 0.35). Therefore, the correct answer is (B).

Mock Corporation Converts to S Corporation Status in 2018