Question

Bourne Company (a fictional company) has the following inventory note in its 20x3 annual report. Bourne Company ($ in millions) Raw materials and work in process Finished goods Less revaluation to LIFO December 31 20x3 20X2 $3,943 $5,870 5,016 2,623 8,959 8,493 (420) (560) $8,539 $7,933 LIFO revaluations decreased $140 million in 20X3, compared with decreases of $169 million in 20x2 and $82 million in 20X1. Included in these changes were decreases of $30 million, $12 million, and $3 million in 20X3, 20x2, and 20X1, respectively, that resulted from lower LIFO inventory levels. There were net cost decreases in each of the last three years. Bourne's earnings before income taxes were $20.0 billion in 20X3. Assume a 21% marginal tax rate. Required: 1. What are the total cumulative tax savings as of December 31, 20x3, that Bourne has realized as a result of using the LIFO inventory method? 2. What would Bourne's pre-tax earnings have been in 20x3 if it had been using FIFO? 3. What December 31, 20X3, balance sheet amounts would be different-and by how much—if Bourne had used FIFO to account for its inventories? 4. What were the LIFO liquidation profits reported in 20x3 both pre-tax and after-tax?

Answer 1

- 420 Answere Summadized the data provided in the tables Bourne Company - © Computation of total cumulative tox savings as of Dec 31, 2083, that Boucone has Galised a result of wing lifo inventely method: Given, Raw material Ecock en progress for $3943 Dec, 31-2003 finished goods 5016 LIFO reserves -Earnings below taxes for year 20x3= sobiller marginal tax rate = 21% Total tax savings due to result of LIfo inventory method; LIFO deseoves x tax = 420X 2107 => $88.2 millien Cumulative total tax saving as tesult of LIFO method Dec 31, 20x3 = $88.9 m @ what would be 'Bouone' poe tox eatnings have been in 20x3 if it had beers using fifo: Gruen earnings before taxes, , Revaluation to LIfo at 20x2 = 560 at 20x3 = 420 change in Lifo 140

Earnings before tax by using fifo - earning befor tox (LIFO) + change in Liro $20 x1000m -1400 $19,860 millions unctor fifo EBT und poetax earnings ☺ what. Dec.-31, 20X3, Balance sheet amounts would be different and by how much if Bouone had used fifo. to account foo its inventories; - Difference in cost of Inventories under fIfo G LIFO methods. => difference of fifo cost & Lifo cost Fifo cost = $8959 iifo cost - $8539 Difference - $420 higher under Fifo Difference in cash amount as per fifo & LIFO le-> $420 x 21%. --$88.9m => lower due to FIFO Difference in betained exonings as per FIFO/LIfo le LIfo retained earnings = (169+82–140) + $ illm LIFO reserves x tax tate = QU'). X480 = 88.2m

amount higher under FIFO = $199.2M Particularos Difference in Impact Inventory.cost $420m. Higher under Fifo method Cash payment $88.2M low under Fifo. Retained earnings $199.2M high under fifo method. 4 what were the LIFO liquidation profits reported in year-3, both poe-taxa after tax, LIfo liquidation profits = $30M (1-2101 After tax $23.7M Before tax 3om ç *
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