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Q. 8-9BE

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 423

Short Answer

Arna, Inc. uses the dollar-value LIFO method of computing its inventory. Data for the past 3 years follow.

Year Ended December 31 Inventory at Current-Year Cost Price Index

2016 $19,750 100

2017 22,140 108

2018 25,935 114

Compute the value of the 2017 and 2018 inventories using the dollar-value LIFO method.

Using the dollar-value LIFO, the value of ending inventory at the end of 2017 and 2018 amounts to $20,560 and $23,125, respectively.

See the step by step solution

Step by Step Solution

Value of ending inventory for 2016 using dollar-value LIFO

As 2016 is the first year for converting dollar value LIFO and the index is also 100, the value of ending inventory at base year would be the same as given.

The computation would be as follow –

A layer is a difference between the ending base year price and the opening base year price.

Ending Inventory at base year prices

Layer at base year prices

X

Price Index

=

Ending Inventory at LIFO Cost

$19,750

$19,750

X

100

=

$19,750

Value of ending inventory at the end of 2016 using dollar-value LIFO amounts to $19,750.

Value of ending inventory for 2017 using dollar-value LIFO

Ending Inventory at base year prices

Layer at base year prices

X

Price Index

=

Ending Inventory at LIFO Cost

2016, $19,750

X

100

=

$19,750

$20,500

2017, + $750

X

108

=

+ $810

$20,500

$20,560

Value of ending inventory at the end of 2016 using dollar-value LIFO amounts to $20,560.

Value of ending inventory for 2018 using dollar-value LIFO

Ending Inventory at base year prices

Layer at base year prices

X

Price Index

=

Ending Inventory at LIFO Cost

2016, $19,750

X

100

=

$19,750

$22,750

2017, + $750

X

108

=

+ $810

2018, + $2,250

X

114

=

+ $2,565

$22,750

$23,125

The value of ending inventory at the end of 2016 using dollar-value LIFO amounts to $23,125.

Most popular questions for Business-studies Textbooks

Question: Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet.

1. Goods out on consignment at another company’s store.

2. Goods sold on an installment basis (bad debts can be reasonably estimated).

3. Goods purchased f.o.b. shipping point that are in transit at December 31.

4. Goods purchased f.o.b. destination that are in transit at December 31.

5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that coversall costs related to the inventory.

6. Goods sold where large returns are predictable.

7. Goods sold f.o.b. shipping point that are in transit at December 31.

8. Freight charges on goods purchased.

9. Interest costs incurred for inventories that are routinely manufactured.

10. Costs incurred to advertise goods held for resale.

11. Materials on hand not yet placed into production by a manufacturing firm.

12. Office supplies.

13. Raw materials on which a manufacturing firm has started production but which are not completely processed.

14. Factory supplies.

15. Goods held on consignment from another company.

16. Costs identified with units completed by a manufacturing firm but not yet sold.

17. Goods sold f.o.b. destination that are in transit at December 31.

18. Short-term investments in stocks and bonds that will be resold in the near future.

Instructions

Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not bereported as inventory, indicate how it should be reported in the financial statements.

The management of Tritt Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing are the company’s financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

Financial Position as of

12/31/16 12/31/17 12/31/18

Cash $ 90,000 $130,000 $154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets $450,000 $540,000 $650,000

Accounts payable $ 40,000 $ 60,000 $ 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity $450,000 $540,000 $650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue $900,000 $1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income $114,000 $ 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at $3.00 each.

2. Sales (all units sold at the same price in a given year):

2017—150,000 units @ $6.00 each 2018—180,000 units @ $7.50 each

3. Purchases (all units purchased at the same price in given year):

2017—150,000 units @ $3.50 each 2018—180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFOhad been used, and state the new amount for each account that is named. Show computations.

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