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Chapter 8: Q. 8-21E (page 429)

The dollar-value LIFO method was adopted by Enya Corp. on January 1, 2017. Its inventory on that date was \(160,000. On December 31, 2017, the inventory at prices existing on that date amounted to \)140,000. Theprice level at January 1, 2017, was 100, and the price level at December 31, 2017, was 112.

Instructions

(a) Compute the amount of the inventory at December 31, 2017, under the dollar-value LIFO method.

(b) On December 31, 2018, the inventory at prices existing on that date was $172,500, and the price level was 115. Computethe inventory on that date under the dollar-value LIFO method.

Short Answer

Expert verified

The value of ending inventory at dollar value LIFO for 2017 and 2018 are $120,800 and $121,250, respectively.

Step by step solution

01

Value of ending inventory at 2017 end at dollar-value LIFO method

Endinginventoryatbaseyearprices=EndinginventoryatcurrentpricesPriceindexattheend=$140,0001.12=$125,000

Openinginventoryatbaseyearprices=OpeninginventoryatcurrentpricesPriceindexattheend=$160,0001=$160,000

As the ending inventory is lower than the opening inventory, the opening inventory at base value would be lowered by the layer at the dollar-value LIFO method.

Endinginventoryatdollar-valueLIFO=openinginventoriesatbaseprices-((openinginventoriesatbaseprices-endinginventoryatbaseprices)脳closingpriceindex)=$160,000(($160,000-$125,000)脳1.12)=$160,000-$39,200=$120,800

02

Value of ending inventory at 2018 end at dollar-value LIFO method

Endinginventoryatbaseyearprices=EndinginventoryatcurrentpricesPriceindexattheend=$172,5001.15=$150,000

Opening inventory for 2018 at base year prices = $125,000

Endinginventoryatdollar-valueLIFO=Endinginventoryatbaseprices-((Endinginventoriesatbaseprices-openinginventoryatbaseprices)脳closingpriceindex)=$150,000(($150,000-$125,000)脳1.15)=$150,000-$28,750=$121,250

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Most popular questions from this chapter

The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs.

This gap is:

With LIFO Without LIFO

Revenues \(3,200,000 \)3,200,000

Cost of goods sold 2,800,000 2,800,000

Operating expenses 150,000 150,000

Operating income 250,000 250,000

LIFO adjustment 40,000 0

Taxable income \( 210,000 \) 250,000

Income taxes @ 36% \( 75,600 \) 90,000

Cash flow \( 174,400 \) 160,000

Extra cash \( 14,400 0

Increased cash flow 9% 0%

Instructions

(a) Explain what is meant by the LIFO reserve account.

(b) How does LIFO subtract inflation from inventory costs?

(c) Explain how the cash flow of \)174,400 in this example was computed. Explain why this amount may not be correct.

(d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.

Question: Craig Company asks you to review its December 31, 2017, inventory values and prepare the necessary adjustments to the books. The following information is given to you.

1. Craig uses the periodic method of recording inventory. A physical count reveals \(234,890 of inventory on hand at December 31, 2017.

2. Not included in the physical count of inventory is \)13,420 of merchandise purchased on December 15 from Browser. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.

3. Included in inventory is merchandise sold to Champy on December 30, f.o.b. destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for \(12,800 on December 31. The merchandise cost \)7,350, and Champy received it on January 3.

4. Included in inventory was merchandise received from Dudley on December 31 with an invoice price of \(15,630. The merchandise was shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.

5. Not included in inventory is \)8,540 of merchandise purchased from Glowser Industries. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30.

6. Included in inventory was \(10,438 of inventory held by Craig on consignment from Jackel Industries.

7. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped on December 31 after it was counted. The invoice was prepared and recorded as a sale for \)18,900 on December 31. The cost of this merchandise was \(10,520, and Kemp received the merchandise on January 5.

8. Excluded from inventory was a carton labeled 鈥淧lease accept for credit.鈥� This carton contains merchandise costing \)1,500 which had been sold to a customer for $2,600. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged; Craig will honor the return.

Instructions

(a) Determine the proper inventory balance for Craig Company at December 31, 2017.

(b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2017. Assume the books have not been closed.

Question:Data for Amsterdam Company are presented in BE8-4. Compute the April 30 inventory and the April cost of goods sold using the LIFO method.

Question:Johnny Football Shop began operations on January 2, 2017. The following stock record card for footballs was taken from the records at the end of the year.

Units Unit Invoice Gross Invoice

Date Voucher Terms Received Cost Amount

1/15 10624 Net 30 50 \(20 \)1,000

3/15 11437 1/5, net 30 65 16 1,040

6/20 21332 1/10, net 30 90 15 1,350

9/12 27644 1/10, net 30 84 12 1,008

11/24 31269 1/10, net 30 76 11 836

Totals 365 $5,234

A physical inventory on December 31, 2017, reveals that 100 footballs were in stock. The bookkeeper informs you that all thediscounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.

Instructions

(a) Compute the December 31, 2017, inventory using the FIFO method.

(b) Compute the 2017 cost of goods sold using the LIFO method.

(c) What method would you recommend to the owner to minimize income taxes in 2017, using the inventory informationfor footballs as a guide?

What is a repurchase agreement (product financing) arrangement? How should a product repurchase agreement be reported in the financial statements?
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