Subject 3 (26%) A. ABC corporation uses the average cost method for inventory valuation. The inventory transactions for the period 2018-2020 are as follows (The purchases are presented in sequence during the year): Opening balance 1.7 Purchases 2018 2019 2020 Units Cost/unit Units Cost/unit Units Cost/unit () () (C) 2.000 6 800 - 1.300 - 500 5 600 2 600 400 3 600 2 500 1.7 400 3.5 500 1.8 500 1.5 200 2 900 1.7 500 1.6 Sales 2,700 units @ Sales 2,100 units @ Sales 2,800 units @ 10/unit 11.5/unit 11.5/unit In order to reduce its income tax expense, ABC is considering switching from average cost to FIFO (first-in-first-out) cost-flow method. Initially, ABC's management investigates whether ABC would have achieved any tax savings if it had used FIFO in the period 2018-2020. In addition, ABC's management estimates the income tax expense that ABC would be charged within 2021 under the two cost-flow methods based upon the following forecasts regarding 2021: 3 Total sales: 2,500 units Selling price for the whole year: 11,5/unit Cost per unit for the whole year: 2,5/unit ABC plans to hold an inventory of 300 units at any time during the year. Required: A. Calculate: i. the tax savings ABC would have achieved if it had used FIFO in the period 2018- 2020. (12%) ii. Calculate the income tax expense that ABC would be charged with in 2021 under the two cost-flow methods based upon the forecasts presented above. (4%) Additional information: a. Assume that the annual income tax rate is 20%. b. ABC uses the periodic inventory system. c. ABC's accounting period starts on January 1 and ends on 31 December of each year. d. The closing inventory as at 31/12/2020 is 600 units. Inventories at hand are valued at the lower of cost or net realizable value. Explain the rationale of this approach and discuss the argument that have been raised against the use of this valuation method. (10%)