needhelp1700

Remember this equation ; A = L + E
So when asset (Inventory ) increased by $900,000 then L & E are to be increased by [900,000*0.4] i.e, Deferred Tax Liab and [900,000*10.4] retained earnings respectively. But in this case the trick is that the addtional tax due was paid hence there will be no deferred tax liability created.
Again note that the tax was paid out of cash (asset) and that is why total asset decreased by LIFO Reserve*tax rate .
You mentioned increased income. Of course, net income is affected when you are converting from LIFO to FIFO. Here’s how net income is affected:
FIFO Net Income = LIFO Net income + Change in LIFO Reserve*(1t).
Hope this helps to clear things a bit.