In: Accounting
Eastman Corporation manufactures one product. On December 31, 2018, Eastman adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was $850,000. Inventory data are as follows:
Year Inventory @ Year-End Prices Price Index (base year 2018
2019 $1,180,000 1.05
2020 $1,940,000 1.15
2021 $1,800,000 1.25
1. Compute the inventory at December 31, 2019, 2020 and 2021, using the dollar-value LIFO method for each year, including the LIFO Reserve.
Please show computations.
2. Prepare the journal entries for the LIFO reserve for 2019 and 2020.
Solution 1:
| Computation of inventory at base year prices and change from prior year | ||||
| Year | Inventory at end of year prices | Price index | Inventory at base year prices | Change from Prior Years | 
| 2018 | $850,000.00 | 100 | $850,000 | $0 | 
| 2019 | $1,180,000.00 | 105 | $1,123,810 | $273,810 | 
| 2020 | $1,940,000.00 | 115 | $1,686,957 | $563,147 | 
| 2021 | $1,800,000.00 | 125 | $1,440,000 | -$246,957 | 
| Computation of dollar value inventory - LIFO | |
| Particulars | Amount | 
| December 31, 2018: | |
| $850,000*1 | $850,000 | 
| December 31, 2019: | |
| $850,000*1 | $850,000 | 
| $273,810*1.05 | $287,501 | 
| Inventory at Dec 31, 2019 | $1,137,501 | 
| December 31, 2020: | |
| $850,000*1 | $850,000 | 
| $273,810*1.05 | $287,501 | 
| $563,147*1.15 | $647,619 | 
| Inventory at Dec 31, 2020 | $1,785,120 | 
| December 31, 2021: | |
| $850,000*1 | $850,000 | 
| $273,810*1.05 | $287,501 | 
| $316,190*1.15 | $363,619 | 
| Inventory at Dec 31, 2021 | $1,501,119 | 
| Inventory at current cost | $1,180,000 | $1,940,000 | $1,800,000 | 
| Less: Inventory at Dollar value LIFO | $1,137,501 | $1,785,120 | $1,501,119 | 
| LIFO Reserve | $42,500 | $154,880 | $298,881 | 
Solution 2:
| Journal Entries | |||
| Date | Particulars | Debit | Credit | 
| 31-Dec-19 | Cost of goods sold Dr | $42,500.00 | |
| To LIFO Reserve | $42,500.00 | ||
| (To record LIFO reserve adjustment) | |||
| 31-Dec-20 | Cost of goods sold Dr ($154,880 - $42,500) | $112,380.00 | |
| To LIFO Reserve | $112,380.00 | ||
| (To record LIFO reserve adjustment) | |||