The beginning LIFO reserve = 50k, ending Lifo reserve = 60k, The firm’s tax rate 40% To adjust end of period owner’s equity in order to calculate debt-to-equity ratio, an analyst should a) make no adjustment b) add 10k c) add 36k d) add 60k Kamp sell specialized bicycle shoes. At year-end due to sudden increase in manufactoring costs, the replacement costs per pair of shoes is $55. The historical cost is $43 and the current selling price is $50. The normal profit margin is 10% of the selling price and the selling cost is $3. at what amount should each pair be reocrded in year-end balanced sheet a) 42 b) 43 c) 47 d) 50 please explain the second question, and if you know what pg can i read about it in the CFA text.
Pepp, for the second question should be B? I guess you will register at lower market cost… not sure
For the first one, at a LIFO-to-FIFO adjustment, the reserve goes: (1-tax rate)*LIFO Reserve to Retained Earnings, Lifo Reserve*Tax rate to DTL Sice FIFO should be used for BS, adjust Ending equity by 0.6*60=36, add 36, that would be C. For the second: Inventory is evaluated at lower of cost or market. Cost: 43 Market:50*0.9-3=42, it should be A. Is it?
getterdone, so are you saying that uncle Sam’s IRS gets nothing off of that sweet reserve?
no the lifo reserve is like getting paid “under the table” what uncle sam (or the CRA) doesn’t know won’t hurt him
For the second question, What if replacement cost had gone down to $40 instead of $55? please explain
lower of cost or market, i would say $40 but I get confused on these. It could be $42 could someone verify?
yeah both these questions are tricky, answers are D and B
Could you please drop the explanations for these answers too?