80.2K

Verified Solution

Link Copied!

ABC corporation uses the average cost method for inventory valuation. The inventory transactions for the period 2018-2020 are as follows (The purchases are presented in sequence during the year): 2018 Units 2019 Units 2020 Units Cost/unit () Cost/unit () Cost/unit () 2,000 6 800 - 1,300 Opening balance Purchases 5 600 2 1.7 500 400 600 500 3 600 2 1.7 500 1.8 400 3.5 200 2 Sales 2,700 units @ 10/unit 900 1.7 Sales 2,100 units @ 11.5/unit 500 1.5 500 1.6 Sales 2,800 units @ 11.5/unit In order to reduce its income tax expense, ABC is considering switching from average cost to FIFO (first-in-first-out) cost-flow method. Initially, ABC's management investigates whether ABC would have achieved any tax savings if it had used FIFO in the period 2018-2020. In addition, ABC's management estimates the income tax expense that ABC would be charged within 2021 under the two cost-flow methods based upon the following forecasts regarding 2021: Total sales: 2,500 units Selling price for the whole year: 11,5/unit Cost per unit for the whole year: 2,5/unit ABC plans to hold an inventory of 300 units at any time during the year. Additional information: Assume that the annual income tax rate is 20%. ABC uses the periodic inventory system. ABC's accounting period starts on January 1 and ends on 31 December of each year. The closing inventory as at 31/12/2020 is 600 units. Calculate the tax savings ABC would have achieved if it had used FIFO in the period 2018- 2020 and the income tax expense that ABC would be charged with in 2021 under the two cost-flow methods based upon the forecasts presented above

Answer & Explanation Solved by verified expert

See Answer