1. Between FIFO or LIFO, which method would result in the lower income tax expense? &...

1. Between FIFO or LIFO, which method would result in the lower income tax expense? & What is the tax savings amount?

Assume a 30 percent average tax rate. (Round your answer to 2 decimal places.)

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	)

Expert Solution

LIFO method would result in the lower income tax expense
The tax savings amount $287

	FIFO	LIFO
Sales	$9,920	$9,920
Less: Cost of goods sold	$3,085	$4,040
Profit	$6,835	$5,880
Tax @30%	$2,051	$1,764
Saving		$287

FIFO
Units	Unit Cost
480	$6	$2,880
160	$8	$1,280
Ending Inventory		$4,160

COGS = Beginning inventory + purchases - ending inventory
=	$2,365 + $4,880 - $4,160
=	$3,085

LIFO
Units	Unit Cost
500	$4.73	$2,365
140	$6	$840
Ending Inventory		$3,205

COGS = Beginning inventory + purchases - ending inventory
=	$2,365 + $4,880 - $3,205
=	$4,040

ekkarill92 answered 3 years ago

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