Question

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.

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 Inventory, January 1 Purchase, January 12 Purchase, January 26 Sale Sale Units 500 600 160 (370) (250) Amount $2,365 3,600 1,280 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.) Tax Savings Method LIFO

Answer 1

Transactions	Units	Amount	Unit cost
Inventory, January 1	500	2365	4.73
Purchase, January 12	600	3600	6
Purchase, January 26	160	1280	8

Total units sold = 370 + 250 =	620
Cost of goods sold as per FIFO = ( 500*4.73 ) + ( 120*6 ) =	3085
Cost of goods sold as per LIFO = (160*8) + (460*6) =	4040
As the cost of goods sold of LIFO is more, it will result in lower tax expenses
Tax saving amount = ( Cost of goods sold as per LIFO - Cost of goods sold as per FIFO ) * Tax% = ( 4040 - 3085 ) * 30% =	286.50

		Tax savings
Method	LIFO	286.50