Reference no: EM132763660

DownTown Corp. uses a Periodic LIFO method to account for 100% of its inventory. In its most recent annual report, DownTown's Balance Sheet contained the following information:

                         Dec. 31, 2017                Dec. 31, 2018
Inventory         $ 25,000,000            $ 24,000,000

DownTown's Inventory Footnote appeared as follows:

• "Downtown uses LIFO to account for all inventory. The amounts reported on the Balance Sheet for Dec. 31, 2017 and Dec. 31, 2018 are $ 5,000,000 and $ 6,300,000, respectively, less than the replacement cost of the inventory.

• Further, during 2017 there was a reduction in the certain inventories which resulted in an increase in pre-tax income of $ 500,000."

Problem A. If DownTown corporation would have used FIFO to account for their inventory (rather than LIFO), their Pre-Tax Income for 2017 would have been $ ______________ (fill in an amount) HIGHER / LOWER (circle one) than the Pre-Tax Income that they reported under LIFO.

Problem B. If DownTown has a tax rate of 40%, what is the cumulative tax savings that DownTown has realized through December 31, 2017 as a result of using LIFO?