Question

Calculate the total Ending Inventory value for 2016, 2017, 2018 and 2019 using dollar-value LIFO. (Show all calculations and the ending inventory amount for each of the years)

Year    Current year inventory            Index  

2016                $50,000                       1.00

2017                $72,000                       1.20

2018                $117,000                     1.30

2019                $119,000                     1.40

Answer 1

Explanation :

The method aggregates cost information for large amounts of inventory, so that individual cost layers do not need to be compiled for each item of inventory.

i)Determine any incremental increases in units of inventory in the next reporting period.

ii)Calculate the extended cost of these incremental units at base year prices.

iii)Multiply the extended amount by the conversion price index. This yields the cost of the LIFO layer for the next reporting period.

First, we need to add two new columns to the original information given in the question ;

i)one to show the inventory at base-year-prices and ii)one to show the changes in inventory from prior year.

It is done as follows:

Year	inventory at the end of year prices	price index	inventory at base year prices	change from prior year
2016	$50,000	1.0	$50,000 ($50,000÷ 1.0)	$ 0
2017	$72,000	1.2	$60,000 ($72,000÷ 1.2)	$10,000 ($60,000 - $50,000)
2018	$1,17,000	1.3	$90,000 ($1,17,000÷ 1.3)	$30,000 ($90,000 - $60,000)
2019	$1,19,000	1.4	$85,000 ($1,19,000÷ 1.4)	($5,000) {$85,000 - $90,00}

Now we can compute dollar value of inventory using LIFO as follows :

Particulars	dollar value of inventory
Year - 2016 :-
$50,000 × 1.0	$50,000
Year 2017 :-
$50,000 × 1.0	$50,000
$10,000 × 1.2	$12,000
Total	$62,000
Year 2018 :-
$50,000 × 1.0	$50,000
$10,000 × 1.2	$12,000
$30,000 × 1.3	$39,000
Total	$1,01,000
Year 2019
$50,000 × 1.0	$50,000
$10,000 × 1.2	$12,000
$25,000 × 1.3	$32,500
Total	$94,500