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Question P8-9

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Intermediate Accounting (Kieso)
Found in: Page 434

Short Answer

On January 1, 2017, Bonanza Wholesalers Inc. adopted the dollar-value LIFO inventory method for income tax and external financial reporting purposes. However, Bonanza continuedto use the FIFO inventory method for internal accounting and management purposes. In applying the LIFO method, Bonanzauses internal conversion price indexes and the multiple pools approach under which substantially identical inventory items aregrouped into LIFO inventory pools. The following data were available for inventory pool no. 1, which comprises products A andB, for the 2 years following the adoption of LIFO.

FIFO Basis per Records

Unit Total

Units Cost Cost

Inventory, 1/1/17

Product A 10,000 $30 $300,000

Product B 9,000 25 225,000

$525,000

Inventory, 12/31/17

Product A 17,000 36 $612,000

Product B 9,000 26 234,000

$846,000

Inventory, 12/31/18

Product A 13,000 40 $520,000

Product B 10,000 32 320,000

$840,000

Instructions

(a) Prepare a schedule to compute the internal conversion price indexes for 2017 and 2018. Round indexes to two decimal places.

(b) Prepare a schedule to compute the inventory amounts at December 31, 2017 and 2018, using the dollar-value LIFO inventory method.

The price index for A and B

2017 120 104

2018 133 128

The ending inventory at dollar value LIFO for A and B is $409,172.4 and $257,000, respectively.

See the step by step solution

Step by Step Solution

Schedule of price index

Current cost of inventory

/

Base cost of inventory

=

Price Index

For Product A, Beg

$30

/

$30

=

1 or 100%

2017

$36

/

$30

=

1.2 or 120%

2018

$40

/

$30

=

1.33 or 133%

For Product B, Beg

$25

/

$25

=

1 or 100%

2017

$26

/

$25

=

1.04 or 104%

2018

$32

/

$25

=

1.28 or 128%

Ending inventory for the period at base year cost

Inventory value at dollar value LIFO

For Product A

Ending inventory at base year prices

Layer at base year prices

X

Price index (percent)

=

Dollar value LIFO

2016

$300,000

$300,000

X

100

=

$300,000

2017

$510,000

$90,977

X

120

=

$109,172.4

2018

$390,977

Total

$409,172.4

For Product B

Ending inventory at base year prices

Layer at base year prices

X

Price index (percent)

=

Dollar value LIFO

2016

$225,000

$225,000

X

100

=

$225,000

2017

$225,000

0

X

104

=

0

2018

$250,000

$25,000

X

128

=

$32,000

Total

$257,000

Most popular questions for Business-studies Textbooks

Case 2: Noven Pharmaceuticals, Inc.

Noven Pharmaceuticals, Inc., headquartered in Miami, Florida, describes itself in a recent annual report as follows.

Noven Pharmaceuticals, Inc.

Noven is a place of ideas—a company where scientific excellence and state-of-the-art manufacturing combine to create new answers to human needs. Our transdermal delivery systems speed drugs painlessly and effortlessly into the bloodstream by means of a simple skin patch. This technology has proven application sinestrogen replacement, but at Noven we are developing a variety of systems incorporating best selling drugs that fight everything from asthma, anxiety and dental pain to cancer, heart disease and neurological illness. Our research portfolio also includes new technologies, such as iontophoresis, in which drugs are delivered through the skin by means of electrical currents, as well as products that could satisfy broad consumer needs, such as our anti-microbial mouth rinse.

Noven also reported in its annual report that its activities to date have consisted of product development efforts, some of which have been independent and some of which have been completed in conjunction with Rhone-Poulenc Rorer (RPR) and Ciba-Geigy. The revenues so far have consisted of money received from licensing fees, “milestone” payments (payments made under licensing agreements when certain stages of the development of a certain product have been completed), and interest on its investments. The company expects that it will have significant revenue in the upcoming fiscal year from the launch of its first product, a transdermal estrogen delivery system.

The current assets portion of Noven’s balance sheet follows.

Cash and cash equivalents $12,070,272

Securities held to maturity 23,445,070

Inventory of supplies 1,264,553

Prepaid and other current assets 825,159

Total current assets $37,605,054

Inventory of supplies is recorded at the lower-of-cost (first-in, first-out)-or-net realizable value and consists mainly of supplies for research and development.

Instructions

(a) What would you expect the physical flow of goods for a pharmaceutical manufacturer to be most like: FIFO, LIFO, or random (flow of goods does not follow a set pattern)? Explain.

(b) What are some of the factors that Noven should consider as it selects an inventory measurement method?

(c) Suppose that Noven had $49,000 in an inventory of transdermal estrogen delivery patches. These patches are from an initial production run and will be sold during the coming year. Why do you think that this amount is not shown in a separate inventory account? In which of the accounts shown is the inventory likely to be? At what point will the inventory be transferred to a separate inventory account?

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