What effect (if any)would the unrealized profits in ending inventory have on income tax expense for 2009?

Question

Quizplus · Accepted Answer

Unrealized profits in ending inventory imply that the cost of goods sold is lower, which in turn reduces the taxable income. Since income tax expense is calculated on the basis of taxable income, a reduction in taxable income would lead to a lower income tax expense. In this case, the unrealized profits in ending inventory are $4,800, and assuming a tax rate of 33.33%, the reduction in income tax expense would be $1,600 ($4,800 x 33.33%). Therefore, the correct answer is A).

What Effect (If Any)would the Unrealized Profits in Ending Inventory