Inventories valued on the LIFO basis at December 31, 2016 and 2015 were approximately $47.5...
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Inventories valued on the LIFO basis at December 31, 2016 and 2015 were approximately $47.5 million and $51.8 million, respectively, less than the amounts of such inventories valued at current costs. As a result of reducing certain inventory quantities valued on the LIFO basis, net income (after tax) increased by $2.2 million, $1.8 million, and $1.3 million in 2016, 2015, and 2014, respectively.
a. By how much would net income (after taxes) have differed for 2016 if Varscom had used FIFO method for valuation of inventory items, instead of LIFO? Assume a 40% marginal tax rate. Be sure to indicate whether FIFO income would be higher or lower than LIFO income. (Hint: By definition, difference between LIFO inventory and current cost inventory is LIFO reserve)
b. What would the LIFO reserve have been on December 31, 2016 if no LIFO liquidation had occurred in 2016? (Hint: without LIFO liquidation, LIFO reserve does not reflect the pretax profit from the liquidation of LIFO layer)
c. What would motivate Varscom management decide to liquidate the LIFO inventory layer?
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