Change from LIFO to FIFO: Year by Year Income Taxes Payable Calculations
Refer to Practice 20 5. Compute TOTAL income taxes payable, after the change to FIFO is made, as of December 31, 2006, December 31, 2007, and December 31, 2008. Recall that the change to FIFO will necessitate the payment of any tax savings that had been created by the use of LIFO.
Practice 20 5
Change from LIFO to FIFO: First Year Retained Earnings
As of January 1, 2008, the company decided to change from the LIFO method of inventory valuation to the FIFO method. The change is being made for both book and tax purposes. Data for the past four years (including 2008) are as follows:
|
|
2008 |
2007 |
2006 |
2005 |
|
Sales |
$2,000 |
$1,500 |
$1,200 |
$1,000 |
|
Cost of goods sold—LIFO |
1,200 |
900 |
720 |
600 |
|
Ending inventory—LIFO |
200 |
150 |
120 |
100 |
|
Ending income taxes payable—LIFO |
n/a |
240 |
192 |
160 |
|
Ending retained earnings—LIFO |
1,668 |
1,188 |
828 |
540 |
|
Cost of goods sold—FIFO |
1,170 |
880 |
710 |
595 |
|
Ending inventory—FIFO |
300 |
220 |
170 |
140 |
The ending income taxes payable—LIFO amount is not given because, in 2008, income taxes payable will be computed using the newly adopted FIFO numbers. As you can see from the prior years, it is the practice of the company to pay all income taxes in the subsequent year. The company’s income tax rate is 40%, and the company has no expenses except for cost of goods sold and income tax expense.