Question

The Hazim Company is a wholesale distributor of automotive replacement parts. For purposes of

this question, assume on January 1, year 3, Hazim Co. adopted the dollar-value LIFO method of

determining inventory costs for financial and income-tax reporting. The following information relates

to this change:

Hazim has continued  to use the FIFO method for internal reporting purposes. Hazim's FIFO

inventories at December 31, Year 3, Year 4, and Year 5, were $100,000, $137,500, and $195,000,

respectively.

The FIFO inventory amounts are converted to dollar-value LIFO amounts using a single inventory

pool and annual cost indexes. Hazim uses the annual indexes developed by its industry trade

association: 1.25 for year 4 and 1.50 for year 5.

Calculate Hazim's dollar-value LIFO inventory at December 31, Year 4 and Year 5. Show all

calculations

Answer 1

Solution:

Calculation of Dollar- value LIFO Inventory on December 31^st for the Year 4^th and year 5^th

Year stage	Year end	Inventory Value as per FIFO method $	Annual index	Inventory Value as per LIFO method = Inventory Value as per FIFO method x Annual index $	Difference = Inventory Value as per LIFO method - Inventory Value as per FIFO method $
Year 3	December 31	1,00,000	1	1,00,000	-
Year 4	December 31	1,37,500	1.25	1,71,875	34,375
Year 5	December 31	1,95,000	1.5	2,92,500	97,500
	Total	4,32,500		5,64,375	1,31,875

Note: Index value for the Third year is taken as 1 as it is considered as the Base Index

Therefore, the value of Inventory for the 31st December of the Fourth Year is $1,71,875 and for 31st December of the Fifth Year is $2,92,500.