Question

The following information relates to the Jimmy Johnson Company.

                                    Ending Inventory                    Ending Inventory

Date     At Base-Year Cost At Current Year Cost Price Index

___________________________________________________________________________________________

12/31/15 (base)                 $68,400                                  $68,400                                    1.00

12/31/16                            $91,600                                 $122,744                                   1.34

12/31/17                            $89,800                                 $132,904                                   1.48

Using dollar-value LIFO, 2016 ending inventory is?

Using dollar-value LIFO, 2017 ending inventory is?

What is the change in inventory in base-year prices in 2016 (i.e., comparing 2016 ending inventory to 2015 ending inventory, what is the change in base-year, not current year, prices)?

What is the change in inventory in base-year prices in 2017 (i.e., comparing 2017 ending inventory to 2016 ending inventory, what is the change in base-year, not current year, prices)?

Including the base-year of $68,400, how many layers are there at the end of 2017? (Hint: Any negative changes in inventory should be a correction to a previous layer, not a new layer.)?

Answer 1

Required 1

Under LIFO method, the stock purchased earlier are in the closing inventory and the stock purchased next are sold.

2016 ending inventory based on Base Year Cost = 91,600

2016 opening inventory based on Base Year Cost =$68,400

Thus there is an increase in inventory of $23,200 (91600 - 68400) based on Base year prices. However these increase has been due to purchases made in 2016 and so must be valued at 2016 prices.

Therefore 2016 ending inventory under LIFO = 68400 + 23200 * 1.34 = $99,488

Required 2

2017 ending inventory based on Base Year Cost = 89,800

2017 opening inventory based on Base Year Cost =$91,600

Thus there is a decrease in inventory of $1800 (91600 - 89800) based on base year prices. However these decrease has been due to sale of inventory from 2016 stock.

Thus 2016 stock balance as at 2017 ending = 23200 - 1800 = $21400

Therefore 2017 ending inventory under LIFO = 68400 + 21400 * 1.34 = $97,076

Required 3

Change in inventory in base year prices in 2016 = Increase of $23,200

Required 4

Change in inventory in base year prices in 2017 = Decrease of $1,800

Required 5

In 2017 there are two layers of inventory

• $68,400 of the 2015 inventory at base price
• $21,400 of the 2016 inventory at base price.

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