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Chapter 8: Q. 8-22E (page 429)

Presented below is information related to Dino Radja Company.

Ending Inventory Price

Date (End-of-Year Prices) Index

December 31, 2014 $ 80,000 100

December 31, 2015 115,500 105

December 31, 2016 108,000 120

December 31, 2017 122,200 130

December 31, 2018 154,000 140

December 31, 2019 176,900 145

Instructions

Compute the ending inventory for Dino Radja Company for 2014 through 2019 using the dollar-value LIFO method.

Short Answer

Expert verified

The ending inventory for Dec 2019 at dollar value LIFO comes out to be $135,500.

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 2014

$80,000

/

100

=

$80,000

Dec 2015

$115,500

/

105

=

$110,000

Dec 2016

$108,000

/

120

=

$90,000

Dec 2017

$122,200

/

130

=

$94,000

Dec 2018

$154,000

/

140

=

$110,000

Dec 2019

$176,900

/

145

=

$122,000

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 2014

$80,000

$80,000

X

100

=

$80,000

Dec 2015

$110,000

$10,000

X

105

=

$10,500

$90,500

Dec 2016

$90,000

Dec 2017

$94,000

$4,000

X

130

=

$5,200

$95,700

Dec 2018

$110,000

$16,000

X

140

=

$22,400

$118,100

Dec 2019

$122,000

$12,000

X

145

=

$17,400

$135,500

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, 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.

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Most popular questions from this chapter

Zonker Inc. purchases 500 units of an item at an invoice cost of \(30,000. What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was\)1,500, what is the cost per unit if Zonker Inc. pays the freight charges? If these items were bought on 2/10, n/30terms and the invoice and the freight bill were paid within the 10-day period, what would be the cost per unit?

You are the vice president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2017. These schedulesappear below.

Sales Cost of Gross

(\(5 per unit) Goods Sold Margin

Schedule 1 \)150,000 \(124,900 \)25,100

Schedule 2 150,000 129,400 20,600

The computation of cost of goods sold in each schedule is based on the following data.

Cost Total

Units per Unit Cost

Beginning inventory, January 1 10,000 \(4.00 \)40,000

Purchase, January 10 8,000 4.20 33,600

Purchase, January 30 6,000 4.25 25,500

Purchase, February 11 9,000 4.30 38,700

Purchase, March 17 11,000 4.40 48,400

Jane Torville, the president of the corporation, cannot understand how two different gross margins can be computed from thesame set of data. As the vice president of finance, you have explained to Ms. Torville that the two schedules are based on differentassumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared inthis sequence of cost flow assumptions.

Instructions

Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the endinginventory under both cost flow assumptions.

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.

(FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.

The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at \(8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is \)400,000.

The company has made the following forecasts for the period 2017–2019.

2017

2018

2019

Unit sales (in millions of units)

1.1

1.0

1.3

Sales price per unit

\(10

\)12

\(12

Unit purchases (in millions of units)

1.0

1.1

1.2

Purchase price per unit

\)8

\(9

\)10

Annual depreciation (in thousands of dollars)

\(300

\)300

\(300

Cash dividends per share

\)0.15

\(0.15

\)0.15

Cash payments for additions to and replacement of plant and equipment (in thousands of dollars)

\(350

\)350

$350

Income tax rate

40%

40%

40%

Operating expenses (exclusive of depreciation) as a percent of sales

15%

15%

15%

Common shares outstanding (in millions)

1

1

1

Instructions

a. Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2017–2019. Assume the company would begin LIFO at the beginning of 2017.

  1. Year-end inventory balances.
  2. Annual net income after taxes.
  3. Earnings per share.
  4. Cash balance.

Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.

b. Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.

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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