Question

Webster Products, Inc., adopted the dollar-value LIFO method of determining inventory costs for financial and income tax reporting on January 1, 2021. Webster continues to use the FIFO method for internal decision-making purposes. Webster’s FIFO inventories at December 31, 2021, 2022, and 2023, were $300,000, $412,500, and $585,000, respectively. Internally generated cost indexes are used to convert FIFO inventory amounts to dollar-value LIFO amounts. Webster estimated these indexes as follows: 

2021................1.00 

2022.................1.25 

2023.................1.50 

 

Required: 

1. Determine Webster’s dollar-value LIFO inventory at December 31, 2022 and 2023. 

2. Will Webster account for the change (a) retrospectively or (b) prospectively?

Answer 1

Requirement 1:

Webster Products, Inc. adopted the dollar value LIFO method for determine the inventory costs both for financial as well as income tax reporting purpose. The dollar value of the inventory in LIFO method will be as under:

Detail	2021	2022	2023
Inventory in FIFO	$300,000	$412,500	$585,000
Index	1.00	1.25	1.50
Inventory at base year cost	$300,000	$330,000	$390,000

 

The inventory is calculated on the base year price. The inventory is divided in the base year cost and then multiplied by the index to find out the dollar value LIFO inventory as under:

Detail	Inventory at base year cost	Division at base price	Index	inventory at Dollar Value LIFO method
2021	$300,000	$300,000	1.00	$300,000
2022	$330,000	$300,000	1.00	$300,000
		$30,000	1.25	$37,500
Total				$337,000
2023	$390,000	$300,000	1.00	$300,000
		$30,000	1.25	$37,500
		$60,000	1.50	$90,000
Total				$427,500

 

The calculation of inventory at base year price:

2021

Inventory = $300,000

Index price = 1.00

Inventory at base price

Inventory at base price = $300,000/1

= $300,000

 

2022

Inventory = $412,500

Index price = 1.25

Inventory at base price

Inventory at base price = $415,500/1.25

= $330,000

 

2023

Inventory = $585,000

Index price = 1.50

Inventory at base price

Inventory at base price = $585,000/1.50

= $390,000

 

Calculate the inventory at dollar price:

Year	Inventory at base year cost	Division at base price	Index	inventory at Dollar Value LIFO method
2021	$300,000	$300,000	1.00
2022	$330,000	$300,000	1.00
		$30,000	1.25
Total				$337,000
2023	$390,000	$300,000	1.00
		$30,000	1.25
		$60,000	1.50
Total				$427,500

 

Requirement 2:

State how to report the3 changes in the balance sheet:

The company wants to change the method to the LIFO inventory method. The change in method of inventory is an accounting change which is reported retrospectively. But in case where the method is changed to LIFO, it is assumed that all the relevant information with the company is not found. In this way the change is reported prospectively.

The same base year inventory is adopted which is given in the beginning of the year 2021 i.e. $300,000.

A disclosure note to describe the nature of correction and its effect is also being mentioned in the financial statement describing the effect of the error on the net income and net income before extra-ordinary items and per share income.

The reasons of not reporting the change retrospectively is clearly are mention in the disclosure note of the company.

1. $427,500

2. The reasons of not reporting the change retrospectively is clearly are mention in the disclosure note of the company.