In 2014 George used the FIFO lower of cost or market inventory method.As of December 31,2014,the inventory cost was $50,000 and its market price was $40,000.At the time of filing his 2015 income tax return,George changed to the LIFO method.The ending inventory at cost on December 31,2015,was $75,000 and the market price of the goods totaled $35,000.Which of the following statements is correct?
A)The beginning inventory for 2015 is $50,000,and George must spread a $10,000 adjustment ($50,000 - $40,000)evenly over 2015,2016,and 2017.
B)The beginning inventory for 2015 is $40,000.
C)The beginning inventory for 2015 is $50,000,and George must spread a $10,000 adjustment over the three previous years.
D)The change is invalid since the taxpayer did not apply for the change by the end of the tax year of change.
E)None of these.

Question

Quizplus · Accepted Answer

The change in accounting method is effective January 1,2014.The lower of cost or market cannot be used in conjunction with LIFO.Thus,the $10,000 writedown must be restored to inventory which results in income of $10,000.This $10,000 adjustment can be spread ratably over the year of the change and the two succeeding years.

In 2014 George Used the FIFO Lower of Cost or Market