Chapter 7, Problem 8P

Evaluating the Choice between LIFO and FIFO Based on an Inventory Note

An annual report for International Paper Company included the following note:

The last-in, first-out inventory method is used to value most of International Paper's U.S. inventories … If the first-in. first-out method had been used, it would have increased total inventory balances approximately $350 million and $334 million at December 31, 2011, and 2010, respectively.

For the year 2011, International Paper Company reported net income (after taxes) of $1,341 million. At December 31, 2011, the balance of International Paper Company’s retained earnings account was $3,330 million.

Required:

1. 1. Determine the amount of net income that International Paper would have reported in 2011 if it had used the FIFO method (assume a 30 percent tax rate).
2. 2. Determine the amount of retained earnings that International Paper would have reported at the end of 2011 if it always had used the FIFO method (assume a 30 percent tax rate).
3. 3. Use of the LIFO method reduced the amount of taxes that International Paper had to pay in 2011 compared with the amount that would have been paid if International Paper had used FIFO. Calculate the amount of this reduction (assume a 30 percent tax rate).