Question

Umni Company manufactures one product. Beginning in 2013, Umni adopted the dollar-value LIFO inventory method.

Required: Please show all calculations

Inventory data for the years following the base-year are:

Inventory at Price index

Year year-end prices (base year 2013)

2013 $180,000 1.00

2014 252,000 1.05

2015 264,500 1.15

2016 387,500 1.25

a) Compute the ending inventory at December 31, 2013, 2014, 2015, and 2016, using the dollar-value LIFO method for each year. Clearly indicate the inventory amount that will be reported on the Balance Sheet at 12/31/13, 12/31/14, 12/31/15, and 12/31/16.

b) Write the needed adjusting entry for 12/31/14.

c) What is the LIFO Reserve amount for 12/31/15? What is the LIFO effect for 12/31/15? Write the needed adjusting entry for 12/31/15.

Answer 1

a. Computation of ending inventory at December 31st 2013, 2014, 2015 and 2016 using Dollar-Value LIFO Method for each year

Inventory at the end of 2014

Comparing the year end inventory value of 2013 and 2014 at base year price , the change would be $60,000

Restating the change in price as per the year 2014 i.e 60,000*1.05 = $63,000

Inventory at the end of 2015

Comparing the base year value of 2014 and 2015, there is a decrease of $10,000

If there is a decrease in value, then it will be adjusted against the most recent layer. In the given case, the second layer was added for year 2014 is $60,000 at base year prices. After adjusting the decrease the adjusted amount will be (60,000-10,000)=$50,000. The amount shall restated the change as per 2014 price i.e 1.05 not on 1.15

Note : No layer is added when the inventory decreased. New layer is added only if ending inventory at base year price is more than respective year's beginning inventory at base year prices.

Inventory at the end of 2016

Comparing the base year values of 2014 and 2015, there is an increase of $80,000

As the ending inventory at base year price level is more than 2014 inventory, new layer will be added with the value of $80,000. This will be restated using 2016 price index 1.25 and the price will be $80000*1.25 = $100,000

Amounts to be reported in Balance sheet for each year as follows:

b. Needed adjustment in 2014

c. LIFO Reserve amount, the LIFO effect and the needed entry for 2015

LIFO Reserve amount = FIFO Inventory Cost - LIFO Inventory Cost

LIFO Effect

2014 LIFO Reserve $9,000

2015 closing LIFO Reserve $32,000

Therefore the LIFO Effect will be $32,000-$9,000 = $23,000

Needed Entry