If cost of goods sold under FIFO was $8,000 and was $10,000 under LIFO, assuming a tax rate of 40%, how much tax savings resulted from using LIFO?
A) $ 1,200
B) $ 800
C) $ 2,000
D) There would be no tax savings.

Question

Quizplus · Accepted Answer

The tax savings resulting from using LIFO can be calculated as follows:

Tax savings = (COGS under FIFO – COGS under LIFO) x tax rate

Tax savings = ($8,000 - $10,000) x 0.4

Tax savings = -$2,000 x 0.4

Tax savings = -$800 (Note that this is a negative tax savings, i.e. a tax expense)

Therefore, the correct answer is B, as this is the only option that matches the calculated tax savings of $800.

If Cost of Goods Sold Under FIFO Was $8,000 and Was