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Chapter 8: Question CA8-9 (page 437)

Arruza Co. is considering switching from the specific-goods LIFO approach to the dollar-value LIFO approach. Because the financial personnel at Arruza know very little about dollar-value LIFO, they ask youto answer the following questions.

(a) What is a LIFO pool?

(b) Is it possible to use a LIFO pool concept and not use dollar-value LIFO? Explain.

(c) What is a LIFO liquidation?

(d) How are price indexes used in the dollar-value LIFO method?

(e) What are the advantages of dollar-value LIFO over specific-goods LIFO?

Short Answer

Expert verified

Groups of similar inventories make the LIFO pool. It is not possible to use a single method. LIFO liquidation is a problem of selling old inventory. The ending inventory at dollar value LIFO for Dec 2018 comes out to be $120,945. There are five major steps to determine the dollar value of LIFO.

Step by step solution

01

LIFO Pool

A pool is a group of items that have similar nature. A LIFO pool is a group of similar inventories pooled together to avoid the LIFO liquidation problem.

02

LIFO pool vs. dollar value LIFO

No, it is not possible to use only one inventory method as different inventories require different attention. LIFO pools can be time-consuming, costly, and lead to the erosion of layers. Dollar value LIFO overcome these issues by only taking the dollar value and not the physical quantities of goods.

03

LIFO Liquidation

LIFO liquidation is the problem of piling up older inventories and selling them at discounted prices. This happens due to the LIFO approach; all the newest inventories are used first, and only older inventories are leftover.

04

Price index and dollar value LIFO

The price index is the essential factor to determine the dollar value LIFO. The price index is the ratio of the current year’s prices to the base year’s prices.

For determining the dollar-value LIFO. The layers at base cost are converted to the current level by taking the product of layers at the base level and price index.

The obtained product is summed up to get the inventory value.

05

Advantages of dollar value LIFO over specific identification. 

Specific identification is a complex and time-consuming method in which each item is matched with the specific inventories to be sold. Whereas, Under the dollar-value LIFO method the values of ending inventories are matched with the base year prices.

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Most popular questions from this chapter

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?

At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?

Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.

Received

Issued, Balance,

Date No. of Units Unit Cost No. of Units No. of Units

January 2 1,200 $3.00 1,200

7 700 500

10 600 3.20 1,100

13 500 600

18 1,000 3.30 300 1,300

20 1,100 200

23 1,300 3.40 1,500

26 800 700

28 1,600 3.50 2,300

31 1,300 1,000

Instructions

(a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Carry unit costs to the nearest cent and ending inventory to the nearest dollar.)

(1) First-in, first-out (FIFO).

(2) Last-in, first-out (LIFO).

(3) Average cost.

(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, would the amounts shown as ending inventory in (1), (2), and (3) above be the same? Explain and compute. (Round average unit costs to four decimal places.)

Assume that in an annual audit of Harlowe Inc. at December 31, 2017, you findthe following transactions near the closing date.

1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shippingroom on December 31, 2017. The customer was billed on that date and the machine excluded from inventory althoughit was shipped on January 4, 2018.

2. Merchandise costing \(2,800 was received on January 3, 2018, and the related purchase invoice recorded January 5. Theinvoice showed the shipment was made on December 29, 2017, f.o.b. destination.

3. A packing case containing a product costing \)3,400 was standing in the shipping room when the physical inventory wastaken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigationrevealed that the customer’s order was dated December 18, 2017, but that the case was shipped and the customer billedon January 10, 2018. The product was a stock item of your client.

4. Merchandise received on January 6, 2018, costing \(680 was entered in the purchase journal on January 7, 2018. The invoiceshowed shipment was made f.o.b. supplier’s warehouse on December 31, 2017. Because it was not on hand at December31, it was not included in inventory.

5. Merchandise costing \)720 was received on December 28, 2017, and the invoice was not recorded. You located it in thehands of the purchasing agent; it was marked “on consignment.”

Instructions

Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, andgive your reason for your decision on each item.

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 \(1,300,000. At December 31, 2017, Trout’s internal reports indicatedthat the FIFO inventory balance was \)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?
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