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Chapter 9: Question E9-26 (page 481)

You assemble the following information for Seneca Department Store, which computes its inventory under the dollar-value LIFO method. Cost Retail Inventory on January 1, 2017 \(216,000 \)300,000 Purchases 364,800 480,000 Increase in price level for year 9% Instructions Compute the cost of the inventory on December 31, 2017, assuming that the inventory at retail is (a) \(294,300 and (b) \)365,150.

Short Answer

Expert verified
  1. The cost of inventory equals $194,400.
  2. The cost of inventory equals $248,246.

Step by step solution

01

Calculation of ending inventory at base year retail prices

a. The cost of ending inventory at base year retail price is calculated as follows:

EndingInventoryatBaseYearRetailPrice=EndingInventoryatRetail100%+PercentageIncrease=$294,300100%+9%=$270,000

02

Calculation of the cost to retail ratio of beginning inventory

The cost-to-retail ratio of beginning inventory is calculated as follows:

CosttoRetailRatioofBeginningInventory=BeginningInventoryatCostBeginningInventoryatRetail=$216,000$300,000=72%

03

Calculation of the cost to retail ratio of total inventory excluding beginning inventory

The cost-to-retail ratio of total inventory excluding beginning inventory is calculated as follows:
Cost‐to‐RetailRatio=TotalInventoryExcludingBeginningInventoryatCostTotalInventoryExcludingBeginningInventoryatRetail=$364,800$480,000=76%

04

Calculation of ending inventory under dollar-value-LIFO retail method

  1. Ending inventory is calculated as follows:
Ending Inventory at Base Year Retail Prices


Layers at Base Year Retail Prices


Price Index (Percentage)

Cost-to-Retail (Percentage)

Ending Inventory at LIFO Cost

$270,000

2016

$270,000

x

100%

x

72%

=

$194,400

$194,400

05

Calculation of ending inventory at base year retail prices

The cost of ending inventory at base year retail price is calculated as follows:

EndingInventoryatBaseYearRetailPrice=EndingInventoryatRetail100%+PercentageIncrease=$365,150100%+9%=$335,000

06

Calculation of ending inventory under dollar-value-LIFO retail method

b. Ending inventory is calculated as follows:


Ending Inventory at Base Year Retail Prices
Layers at Base Year Retail Prices

Price Index (Percentage)

Cost-to-Retail (Percentage)

Ending Inventory at LIFO Cost

$335,000

2016

$270,000

x

100%

x

72%

=

$194,400

2017

65,000

x

109%

x

76%

=

53,846

$248,246

Thus, the value of inventory in (a) equals $194,400 and in (b) equals $248,246.

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Most popular questions from this chapter

On April 15, 2018, fire damaged the office and warehouse of Stanislaw Corporation. The only accounting record saved was the general ledger, from which the balance sheet data below was prepared. STANISLAW CORPORATION MARCH 31, 2018 Dr. Cr. Cash \( 20,000 Accounts receivable 40,000 Inventory, December 31, 2017 75,000 Land 35,000 Buildings 110,000 Accumulated depreciation \) 41,300 Equipment 3,600 Accounts payable 23,700 Other accrued expenses 10,200 Common stock 100,000 Retained earnings 52,000 Sales revenue 135,000 Purchases 52,000 Miscellaneous expense 26,600 . \(362,200 \)362,200The following data and information have been gathered. 1. The fiscal year of the corporation ends on December 31. 2. An examination of the April bank statement and canceled checks revealed that checks written during the period April 1–15 totaled \(13,000: \)5,700 paid to accounts payable as of March 31, \(3,400 for April merchandise shipments, and \)3,900 paid for other expenses. Deposits during the same period amounted to \(12,950, which consisted of receipts on account from customers with the exception of a \)950 refund from a vendor for merchandise returned in April. 3. Correspondence with suppliers revealed unrecorded obligations at April 15 of \(15,600 for April merchandise shipments, including \)2,300 for shipments in transit (f.o.b. shipping point) on that date. 4. Customers acknowledged indebtedness of \(46,000 at April 15, 2018. It was also estimated that customers owed another \)8,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, \(600 will probably be uncollectible. 5. The companies insuring the inventory agreed that the corporation’s fire-loss claim should be based on the assumption that the overall gross profit rate for the past 2 years was in effect during the current year. The corporation’s audited financial statements disclosed this information: Year Ended December 31 2017 2016 Net sales \)530,000 \(390,000 Net purchases 280,000 235,000 Beginning inventory 50,000 66,000 Ending inventory 75,000 50,000 6. Inventory with a cost of \)7,000 was salvaged and sold for $3,500. The balance of the inventory was a total loss. Instructions Prepare a schedule computing the amount of inventory fire loss. The supporting schedule of the computation of the gross profit should be in good form.

Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2018 at a cost of \(1,000,000. At December 31, 2017, the raw materials to be purchased have a market value of \)950,000. Prepare any necessary December 31, 2017, entry.

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Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Ogala uses the LCNRV rule for these raw materials. The net realizable value of the raw materials is below the original cost. Ogala uses the FIFO inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period. Instructions (a) At which amount should Ogala’s raw materials inventory be reported on the balance sheet? Why? (b) In general, why is the LCNRV rule used to report inventory? (c) What would have been the effect on ending inventory and cost of goods sold had Ogala used the average-cost inventory method instead of the FIFO inventory method for the raw materials? Why?

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