Choice "D" is correct. Under LIFO, the last costs inventoried are the first costs transferred to cost of goods sold. Ending inventory, thus, includes the oldest costs. The ending balance of inventory will typically not approximate replacement cost, as it will under FIFO. Further, LIFO generally does not reflect the actual flow of goods in a company because most companies sell their oldest goods first to prevent holding old or obsolete items. This question asks about current and deferred income tax expenses and about current tax liability. Therefore, it is focusing on the effects of LIFO vs. FIFO on the income statement for tax expense. It further asks about the impact on the balance sheet. As discussed above, LIFO tends to match current revenues with current costs because (in a period of rising prices, as in this case) the cost of goods sold under LIFO tends to be higher than the cost of goods sold under FIFO. The ending inventory under LIFO, however, tends to be lower than the ending inventory under FIFO, as the oldest goods are the ones still in inventory under LIFO.
So, cost of goods sold is higher under LIFO than under FIFO in a period of rising prices. If the expense is higher on the tax return, then, the related income tax expense is lower. Therefore, the current tax liability would be lower.
Choice "b" is incorrect. As discussed above, LIFO tends to match current revenues with current costs because (in a period of rising prices, as in this case) the cost of goods sold under LIFO tends to be higher than the cost of goods sold under FIFO, not lower. Also, the effect on deferred tax really depends on if ending inventory is higher or lower than beginning inventory, so we don't have enough information to evaluate deferred tax liability, asset, or expense.
Choice "c" is incorrect. Cost of goods sold is higher under LIFO than under FIFO in a period of rising prices. If the expense is higher on the tax return, then, the related income tax expense is lower. Therefore, the current tax liability would be lower, not higher. Further, as discussed above, under LIFO (in a period of rising prices), ending inventory tends to be lower than under FIFO, not higher.
Choice "a" is incorrect. Cost of goods sold is higher under LIFO than under FIFO in a period of rising prices. If the expense is higher on the tax return, then, the related income tax expense is lower. Therefore, the current tax liability would be lower, as the option indicates. However, as discussed above, under LIFO (in a period of rising prices), ending inventory tends to be lower than under FIFO, not higher.