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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 management of Tritt Company has asked its accounting department to describe the effect upon the company鈥檚 financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing are the company鈥檚 financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

Financial Position as of

12/31/16 12/31/17 12/31/18

Cash \( 90,000 \)130,000 \(154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets \)450,000 \(540,000 \)650,000

Accounts payable \( 40,000 \) 60,000 \( 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity \)450,000 \(540,000 \)650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue \(900,000 \)1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income \(114,000 \) 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at \(3.00 each.

2. Sales (all units sold at the same price in a given year):

2017鈥�150,000 units @ \)6.00 each 2018鈥�180,000 units @ \(7.50 each

3. Purchases (all units purchased at the same price in given year):

2017鈥�150,000 units @ \)3.50 each 2018鈥�180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFOhad been used, and state the new amount for each account that is named. Show computations.

Accounting, Analysis, and Principles

Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residentialswimming pools. The following inventory data is available for the month of March.

Price per

Units Unit Total

Residential Pumps

Inventory at Feb. 28: 200 \( 400 \) 80,000

Purchases:

March 10 500 \( 450 \)225,000

March 20 400 \( 475 \)190,000

March 30 300 \( 500 \)150,000

Sales:

March 15 500 \( 540 \)270,000

March 25 400 \( 570 \)228,000

Inventory at March 31: 500

Commercial Pumps

Inventory at Feb. 28: 600 \( 800 \)480,000

Purchases:

March 3 600 \( 900 \)540,000

March 12 300 \( 950 \)285,000

March 21 500 \(1,000 \)500,000

Sales:

March 18 900 \(1,080 \)972,000

March 29 600 \(1,140 \)684,000

Inventory at March 31: 500

Accounting

(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and thecost of goods sold for March under first-in, first-out (FIFO).

(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and commercialpumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Englehart鈥檚initial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.

(Hint:The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)

Analysis

(a) Assume you need to compute a current ratio for Englehart. Which inventory method (FIFO or dollar-value LIFO) doyou think would give you a more meaningful current ratio?

(b) Some of Englehart鈥檚 competitors use LIFO inventory costing and some use FIFO. How can an analyst compare theresults of companies in an industry, when some use LIFO and others use FIFO?

Principles

Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting methodused by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?

Trout Company uses the LIFO method for financial reporting purposes but FIFO for internal reporting purposes. At January 1, 2017, the LIFO reserve has a credit balance of \(1,300,000. At December 31, 2017, Trout鈥檚 internal reports indicatedthat the FIFO inventory balance was \)2,900,000 and for external reporting purposes the LIFO inventory balance was $1,500,000.What is the amount of the LIFO reserve and the LIFO effect related to 2017? What is the journal entry needed to record the LIFOeffect at December 31, 2017?

Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Units Unit Total Units Selling Total

InCostSoldPrice

Date Transaction

July 1 Balance 100 \(4.10 \) 410

6 Purchase 800 4.20 3,360

7 Sale 300\(7.00 \) 2,100

10 Sale 300 7.30 2,190

12 Purchase 400 4.50 1,800

15 Sale 200 7.40 1,480

18 Purchase 300 4.60 1,380

22 Sale 400 7.40 2,960

25 Purchase 500 4.58 2,290

30 Sale 200 7.50 1,500

Totals 2,100\(9,240 1,400\)10,230

Instructions

(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

(1) FIFO.

(2) LIFO.

(3) Weighted-average.

(b) Answer the following questions.

(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.

(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.

The following is a record of Pervis Ellison Company鈥檚 transactions for Boston Teapots for the month of May 2017.

May 1 Balance 400 units @ \(20 May 10 Sale 300 units @ \)38

12 Purchase 600 units @ \(25 20 Sale 540 units @ \)38

28 Purchase 400 units @ $30

Instructions

(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO?

(b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.
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