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Chapter 8: Q. 8-23E (page 429)

The following information relates to the Jimmy Johnson Company.

Ending Inventory Price

Date (End-of-Year Prices) Index

December 31, 2013 $ 70,000 100

December 31, 2014 90,300 105

December 31, 2015 95,120 116

December 31, 2016 105,600 120

December 31, 2017 100,000 125

Instructions

Use the dollar-value LIFO method to compute the ending inventory for Johnson Company for 2013 through 2017.

Short Answer

Expert verified

The ending inventory for Dec 2013and 2014 at dollar value LIFO comes out to be $70,000 and $80,500. Due to the negative layer adjustment, the value of inventory from 2014 to 2017 would be the same.

Step by step solution

01

Computation of ending inventory at base year prices

Date

Ending Inventory at current year prices

/

Price Index

=

Ending inventory at base year prices

Dec 2013

$70,000

/

100

=

$70,000

Dec 2014

$90,300

/

105

=

$86,000

Dec 2015

$95,120

/

116

=

$82,000

Dec 2016

$105,600

/

120

=

$88,000

Dec 2017

$100,000

/

125

=

$80,000

02

Value of ending inventory at dollar-value LIFO method

Date

Ending Inventory at base year prices

Layer at base year Prices

X

Price Index

=

Ending inventory at dollar value LIFO

Dec 2013

$70,000

$70,000

X

100

=

$70,000

Dec 2014

$86,000

$10,000

X

105

=

$10,500

$80,500

Dec 2015

$82,000

Dec 2016

$88,000

Dec 2017

$80,000

$80,500

Note:- The ending inventory in Dec 2016 is lower than the ending inventory in Dec 2015. So, the reduction value would be adjusted in the 2015 layer at the base value ($16,000-$4,000), and no inventory value would be computed for 2016. The second and third layers would be the same, and inventory value for 2016 would be the same as inventory value for 2015. In 2018 again, the inventory at the end was lower than the inventory at the beginning. So the negative layer would be peeled off from the previous assed layers. ($8,000 would be deducted from the 2017 layer of $6,000 and the 2015 layer of $12,000.

As a result, there would be only two layers of $70,000 and $10,000. The value of ending inventory in 2018 would be $80,500.

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Most popular questions from this chapter

Cruise Industries purchased \(10,800 of merchandise on February 1, 2017,

subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned \)2,500 (gross price before trade or cash discount)on February 4. The invoice was paid on February 13.

Instructions

(a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(b) Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(c) At what amount would the purchase on February 1 be recorded if the net method were used?

Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.

June 1 Balance 300 units @ \(10 June 10 Sold 200 units @ \)24

11 Purchased 800 units @ \(12 15 Sold 500 units @ \)25

20 Purchased 500 units @ \(13 27 Sold 300 units @ \)27

Instructions

(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under(1) LIFO and (2) FIFO.

(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?

(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?

(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?

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?

As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?

Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.

1. An invoice for \(8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.

2. Materials costing \)28,000, shipped f.o.b. destination, were not entered by December 31, 2016, 鈥渂ecause they were in a railroad car on the company鈥檚 siding on that date and had not been unloaded.鈥�

3. Materials costing \(7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier鈥檚 place of business until January 6, 2017.

4. An invoice for \)7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.

5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because 鈥渢hey were ordered with a specified delivery of no earlier than January 10, 2017.鈥�

Instructions -

Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.
See all solutions

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