Fifo and the lower of cost or market

Question

On February 12, 2002, Nancy Trout and Delores Lake formed Kingfisher Corporation to sellfishing tackle. Pertinent information  regarding Kingfisher is summarized as follows:

• Kingfisher's business address is 1717 Main Street, Ely, MN 55731; its telephone number is [phone]; and its e-mail address is [email protected].

• The employer identification number is 11-1111111, and the principal business activity code is 451110.

• Nancy owns 50% of the common stock and is president of the company, and Delores owns 50% of the common stock and is vice president of the company. No other class of stock is authorized.

• Both Nancy and Delores are full-time employees of Kingfisher. Nancy's Social Security number is 123-45-6789, and Delores's Social Security number is 987-65-4321.

• Kingfisher is an accrual method, calendar year taxpayer. Inventories are determined

using FIFO and the lower of cost or market method. Kingfisher uses the straight-line method of deprecation for book purposes and accelerated depreciation (MACRS) for tax purposes.

• During 2012, the corporation distributed cash dividends of $64,000.

Income Statement
Income
Gross sales $1,884,000
Sales returns and allowances (64,000)
Net sales $1,820,000
Cost of goods sold (736,000)
Gross profit $1,084,000
Dividends received from stock
investments in less-than-20%-owned
U.S. corporations 9,000
Interest income
State bonds $ 2,500
Certificates of deposit 4,000 6,500
Total income $1,099,500
Expenses
Salaries-officers
Nancy Trout $150,000
Delores Lake 150,000 $300,000
Salaries-clerical and sales 232,000
Taxes (state, local, and payroll) 68,000
Repairs and maintenance 45,000
Interest expense:
Business loans $ 10,000
Loan to purchase state bonds 1,800 11,800
Advertising 5,000
Rental expense 38,000
Depreciation* 32,000
Charitable contributions 12,000
Employee benefit programs 19,000
Premiums on term life insurance policies
on lives of Nancy Trout and Delores
Lake; Kingfisher is the designated
beneficiary 12,800
Legal and accounting services 16,000
Total expenses (791,600)
Net income before taxes $ 307,900
Federal income tax (105,593)
Net income per books $ 202,307