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

Explanation:

Fifo means first come first out

Under the fifo method we dispose oldest purchased units first.

 Purchase  

DateUnitsC.P.UTotal

1-Jan680  5         3400

12-Jan650  7         4550

26-Jan210  9        1890

              Disposal                              Closing

UnitsC.P.UTotal                UnitsC.P.UTotal

5405         2700                  140     5           700

                                                         650     7          4550

                                                          210     9           1890

We sold 540 units of first purchased from 1-Jan

 1405         700                   590           7          4130

  607         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  

DateUnitsC.P.UTotal

1-Jan680  5         3400

12-Jan650  7         4550

26-Jan210  9        1890

              Disposal                              Closing

UnitsC.P.UTotal                UnitsC.P.UTotal

 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

UnitsC.P.UTotal                UnitsC.P.UTotal

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

                                                  21091890

                                                  33072310

                                                   20071400

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.

Deferred (interest)

Explanation:

I have to have a certain amount of characters so don't mind this part down here