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30 November, 09:07

At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $15.80 per unit: Transactions Units Amount Inventory, January 1 680 $ 3,400 Purchase, January 12 650 4,550 Purchase, January 26 210 1,890 Sale (540) Sale (200) 3. Between FIFO or LIFO, which method would result in the lower income tax expense

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  1. 30 November, 09:44
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    Fifo means first come first out

    Under the fifo method we dispose oldest purchased units first.

    Purchase

    Date Units C. P. U Total

    1-Jan 680 5 3400

    12-Jan 650 7 4550

    26-Jan 210 9 1890

    Disposal Closing

    Units C. P. U Total Units C. P. U Total

    540 5 2700 140 5 700

    650 7 4550

    210 9 1890

    We sold 540 units of first purchased from 1-Jan

    140 5 700 590 7 4130

    60 7 420 210 9 1890

    We sold 140 units from first purchase 1-january and 60 units from 2nd purchase 12-january

    under the fifo method profit is as follows

    Sale proceeds = 15.8*540 8532

    15.8*200 3160

    11,692

    Cost as given above

    540*5 2700

    140*5 700

    60*7 420

    Total Cost 3820

    Profit (Sale - Cost) 7872

    B) Lifo means last come first out

    Under the lifo method we dispose earliest purchased units first.

    Purchase

    Date Units C. P. U Total

    1-Jan 680 5 3400

    12-Jan 650 7 4550

    26-Jan 210 9 1890

    Disposal Closing

    Units C. P. U Total Units C. P. U Total

    210 9 1890 680 5 3400

    330 7 2310 320 7 2240

    540 4200

    We disposed off 26-january units 210 first and 12-january 330

    Disposal Closing

    Units C. P. U Total Units C. P. U Total

    200 7 1400 680 5 3400

    120 7 840

    We disposed off 26-january units 200

    Sale proceeds = 15.8*540 8532

    15.8*200 3160

    11,692

    Cost as given above

    210 9 1890

    330 7 2310

    200 7 1400

    Total Cost 5600

    Profit (Sale - Cost) 6092

    Profit under Fifo 7882

    Profit under Fifo 6092

    there is positive correlation between tax and profit Higher the profit higher the tax will be paid, so under the lifo method profit is lower and the tax amount charged will be lower as compared to tax charged under fifo method.
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