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Chapter 8: 18Q (page 422)

On December 31, 2016, the inventory of Powhattan Company amounts to \(800,000. During 2017, the company decides to use the dollar-value LIFO method of costing inventories. On December 31, 2017, the inventory is \)1,053,000 at December 31, 2017, prices. Using the December 31, 2016, price level of 100 and the December 31, 2017, price level of 108, compute the inventory value at December 31, 2017, under the dollar-value LIFO method.

Short Answer

Expert verified

Ending inventory for Dec 2017 at dollar value LIFO comes out to be $989,000.

Step by step solution

01

Ending Inventory at base year price for 2017

Endinginventoryatbaseyearprice=EndinginventoryatcurrentyearpricePriceIndex=$1,053,0001.08=$975,000

02

LIFO layer at Dec 2017

SecondLIFOlayer=Endinginventory(2017)atbaseyearprice-Beginninginventory(2017)atbaseyearprice=$975,000-$800,000=$175,000

03

Ending Inventory at dollar value LIFO

Endinginventory(2017)=Firstlaye×Firstpriceindex+Secondlayer×Secondpriceindex=$800,000×1+$175,000×1.08=$800,000+$189,000=$989,000

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Most popular questions from this chapter

Why should inventories be included in (a) a statement of financial position and (b) the computation of net income?

Clay Mattews, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Clay understands the more sophisticated computer inventory control systems, he has littleknowledge of how inventory cost is determined. In studying the records of Strider Enterprises, which sells normal brand-namegoods from its own store and on consignment through Chavez Inc., he asks you to answer the following questions.

Instructions

(a) Should Strider Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yetreceived if the terms of purchase are f.o.b. shipping point (manufacturer’s plant)? Why?

(b) Should Strider Enterprises include freight-in expenditures as an inventory cost? Why?

(c) If Strider Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?

(d) What are products on consignment? How should they be reported in the financial statements?

Question:Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing.

2016 2017 2018

Sales revenue \(290,000 \) ?$410,000

Sales returns and allowances 11,000 13,000 ?

Net sales ? 347,000 ?

Beginning inventory 20,000 32,000 ?

Ending inventory ? ? ?

Purchases ? 260,000 298,000

Purchase returns and allowances 5,000 8,000 10,000

Freight-in 8,000 9,000 12,000

Cost of goods sold 233,000 ? 293,000

Gross profi t on sales 46,000 91,000 97,000

Case 2: Noven Pharmaceuticals, Inc.

Noven Pharmaceuticals, Inc., headquartered in Miami, Florida, describes itself in a recent annual report as follows.

Noven Pharmaceuticals, Inc.

Noven is a place of ideas—a company where scientific excellence and state-of-the-art manufacturing combine to create new answers to human needs. Our transdermal delivery systems speed drugs painlessly and effortlessly into the bloodstream by means of a simple skin patch. This technology has proven application sinestrogen replacement, but at Noven we are developing a variety of systems incorporating best selling drugs that fight everything from asthma, anxiety and dental pain to cancer, heart disease and neurological illness. Our research portfolio also includes new technologies, such as iontophoresis, in which drugs are delivered through the skin by means of electrical currents, as well as products that could satisfy broad consumer needs, such as our anti-microbial mouth rinse.

Noven also reported in its annual report that its activities to date have consisted of product development efforts, some of which have been independent and some of which have been completed in conjunction with Rhone-Poulenc Rorer (RPR) and Ciba-Geigy. The revenues so far have consisted of money received from licensing fees, “milestone” payments (payments made under licensing agreements when certain stages of the development of a certain product have been completed), and interest on its investments. The company expects that it will have significant revenue in the upcoming fiscal year from the launch of its first product, a transdermal estrogen delivery system.

The current assets portion of Noven’s balance sheet follows.

Cash and cash equivalents \(12,070,272

Securities held to maturity 23,445,070

Inventory of supplies 1,264,553

Prepaid and other current assets 825,159

Total current assets \)37,605,054

Inventory of supplies is recorded at the lower-of-cost (first-in, first-out)-or-net realizable value and consists mainly of supplies for research and development.

Instructions

(a) What would you expect the physical flow of goods for a pharmaceutical manufacturer to be most like: FIFO, LIFO, or random (flow of goods does not follow a set pattern)? Explain.

(b) What are some of the factors that Noven should consider as it selects an inventory measurement method?

(c) Suppose that Noven had $49,000 in an inventory of transdermal estrogen delivery patches. These patches are from an initial production run and will be sold during the coming year. Why do you think that this amount is not shown in a separate inventory account? In which of the accounts shown is the inventory likely to be? At what point will the inventory be transferred to a separate inventory account?

On January 1, 2017, Bonanza Wholesalers Inc. adopted the dollar-value LIFO inventory method for income tax and external financial reporting purposes. However, Bonanza continuedto use the FIFO inventory method for internal accounting and management purposes. In applying the LIFO method, Bonanzauses internal conversion price indexes and the multiple pools approach under which substantially identical inventory items aregrouped into LIFO inventory pools. The following data were available for inventory pool no. 1, which comprises products A andB, for the 2 years following the adoption of LIFO.

FIFO Basis per Records

Unit Total

Units Cost Cost

Inventory, 1/1/17

Product A 10,000 \(30 \)300,000

Product B 9,000 25 225,000

\(525,000

Inventory, 12/31/17

Product A 17,000 36 \)612,000

Product B 9,000 26 234,000

\(846,000

Inventory, 12/31/18

Product A 13,000 40 \)520,000

Product B 10,000 32 320,000

$840,000

Instructions

(a) Prepare a schedule to compute the internal conversion price indexes for 2017 and 2018. Round indexes to two decimal places.

(b) Prepare a schedule to compute the inventory amounts at December 31, 2017 and 2018, using the dollar-value LIFO inventory method.
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