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

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.