Question

Eleanor Copy Center sells laser printers and supplies. Eleanor Copy Center started the year with 90 containers of ink (average cost of $8.50 each, FIFO cost $8.90 each, LIFO cost of $7.80 each). During the year, Eleanor Copy Center purchased 720 containers of ink at $10.30 and sold 580 units for $19.75 each. Eleanor Copy Center paid operating expenses throughout the year, a total of $4,100. Eleanor Copy Center's income statement- excluding the effects of income tax under each of the average-cost, FIFO, and LIFO inventory costing methods-is given.

Eleanor Copy Center is a corporation subject to a 25% income tax. Compute Eleanor Copy Center's income tax expense under the average, FIFO, and LIFO inventory costing methods. Which method would you select to (A) maximize income before tax and (B) minimize income tax expense? (See Chart)

minimize Income tax expense? (Round your answer to the nearest Whole dollar.) FIFO Sales revenue Average Cost $ 11,455 $ 5,858 L IFO 11,455 $ 11,455 5,848 5,974 Cost of goods sold Gross profit $ 5,597 4,100 Operating expenses 5,607 $ 5,481 4,100 4,100 1,507 $ 1,381 Net income before tax 1,497 $ Income tax expense Enter any number in the edit fields and then click Check Answer.

Answer 1

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Average Cost Method			FIFO Method	Cost of Goods sold		LIFO Method	Cost of Goods sold
Date	No. of Units	Cost per unit	Inventory Value		Date	No. of Units	Cost per unit	Inventory Value		Date	No. of Units	Cost per unit	Inventory Value
Beginning	90.00	8.50	765.00		Beginning	90.00	8.90	801.00		Purchased	580.00	10.30	5,974.00
Purchased	720.00	10.30	7,416.00		Purchased	490.00	10.30	5,047.00
Total	810.00	10.10	8,181.00
Goods sold	580.00	10.10	5,858.00		Total	580.00		5,848.00		Total	580.00		5,974.00

Sale Value
No. of Units	Cost per unit	Sale Value
580.00	19.75	11,455.00

Income Statement	Average Cost	FIFO	LIFO
Sales Revenue	11,455.00	11,455.00	11,455.00
Less: Cost of Goods sold	5,858.00	5,848.00	5,974.00
Gross Profit	5,597.00	5,607.00	5,481.00
Less: Operating Expense	4,100.00	4,100.00	4,100.00
Net Income before tax	1,497.00	1,507.00	1,381.00
Income tax @ 25%	374.00	377.00	345.00

Answer a

Net Income before tax is highest in FIFO. So FIFO method maximizes income before tax.

Answer b

income tax expense is lowest in LIFO. So LIFO method minimizes income tax.