Question

Required information [The following information applies to the questions displayed below.] At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $16 per unit: Transactions Units Amount Inventory, January 1 500 $ 2,365 Purchase, January 12 600 3,600 Purchase, January 26 160 1,280 Sale (370 ) Sale (250 ) 3. Between FIFO or LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate. (Round your answer to 2 decimal places.)

Answer 1

LIFO Method Results in Lower Income Taxes. Since Cost of goods sold is higher in LIFO, it results in lower profit thus leads to low taxes Working; Computation of Cost of goods sold under both methods: Cost of goods sold FIFO LIFO $ 3,085 $ 4,040 FIFO Method: Beginning Inventory Purchases Purchases Cost of goods available Cost of goods sold @ (370+250)=620 Units 500 units @ 4.73 120 Units @6 Units Unit Cost Total Cost 500 $ 4.73 2365 600 $ 6.00 3600 160 $ 8.00 1280 1260 7245 $ 2,365 $ 720 $ 3,085 LIFO Method: Beginning Inventory Purchases Purchases Cost of goods available Cost of goods sold @ (370+250)=620 Units 160 units @ 8 460 units @6 Units Unit Cost Total Cost 500 $ 4.73 2365 600 $ 6.00 3600 160 $ 8.00 1280 1260 7245 $ 1,280 $ 2,760 $ 4,040