FIFO method of inventory costing

J.K. Leask Wholesale Corp. uses the LIFO method of inventory costing. In the current year, profit at J.K. Leask is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year’s net income and to take advantage of the changing income tax rate, the president of J.K. Leask Wholesale instructs the accountant to recommend to the purchasing department a large purchase of inventory for delivery three days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value.

(a) What is the effect of this transaction on this year’s and next year’s income statement and income tax expense? Why?

(b) If J.K. Leask Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?

(c) Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?

Solution:

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