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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Dollar-Value LIFO Retail The following information is obtained from Burger Company’s records. Burger uses the dollar-value LIFO retail method.

Chapter 8, Problem 10P, Dollar-Value LIFO Retail The following information is obtained from Burger Companys records. Burger , example  1

The company adopted LIFO on January 1, 2019, when the cost and retail values of the inventory were $50,000 and $100,000, respectively. Burger experienced the following price indexes:

Chapter 8, Problem 10P, Dollar-Value LIFO Retail The following information is obtained from Burger Companys records. Burger , example  2

Required:

Compute the cost of the ending inventory for 2019, 2020, and 2021. Round the cost-to-retail ratio to 3 decimal places.

To determine

Calculate the cost of ending inventory for 2019, 2020, and 2021 using the dollar-value LIFO retail inventory method.

Explanation

Dollar-Value-LIFO: This method shows all the inventory figures at dollar price rather than units. Under this inventory method, the units that are purchased last are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.

Calculate the cost of ending inventory for 2019, 2020, and 2021 using the dollar-value LIFO retail inventory method.

For the year 2019:

Step 1: Calculate the amount of estimated ending inventory at retail.

B Company
Ending Inventory Under DVL Retail Method
For the Year 2019
DetailsCost ($)Retail ($)
Beginning inventory50,000100,000
Add:  Net purchase200,000420,000
          Net additional markups 20,000
Less:  Net markdowns  0(10,000)
Goods available for sale – Excluding beginning inventory200,000430,000
Goods available for sale – Including beginning inventory250,000530,000
Less:  Net sales (400,000)
Estimated ending inventory at retail for 2019 $130,000

Table (1)

Step 2:  Calculate ending inventory at retail at base-year prices.

Ending inventory at retail at base-year prices }=[ Ending inventory at retail×(Price index on 1/1/19Price index on 31/12/19)]=[ $130,000×(100108)]=$120,370

Step 3: Calculate inventory change at retail at base year prices.

Inventory change at retail at base-year prices}(Ending inventory at retail at base-year pricesBeginning inventory at retail)=($120,370$100,000)=$20,370

Step 4: Calculate the change at relevant current costs.

Change at relevant current costs =[Inventory change at retail at base-year prices×(Price index on 31/12/19Price index on 1/1/19)×Cost-to-retail ratio]=[$20,370×(108100)×.465]=$10,230

Step 5: Calculate ending inventory at cost.

Ending inventory at cost = (Base-year layer + 2019 layer)=[$50,000(Beginning inventory for 2019)+$10,230(Change at current cost)]=$60,230

Hence, the ending inventory at cost for 2019 is $60,230.

Working note 1:

Calculate cost-to-retail ratio.

Cost-to-retail ratio= (Beginning inventory for costBeginning inventory for retail)=($50,000$100,000)=.5

Working note 2:

Calculate cost-to-retail ratio.

Cost-to-retail ratio= (Goods available for sale at retail excluding beginning inventoryGoods available for sale at retail excluding beginning inventory)=($200,000$430,000)=.465

For the year 2020:

Step 1: Calculate the amount of estimated ending inventory at retail.

B Company
Ending Inventory Under DVL Retail Method
For the Year 2020
DetailsCost ($)Retail ($)
Beginning inventory60,230130,000
Add:  Net purchase250,000550,000
          Net additional markups 30,000
Less:  Net markdowns  0(40,000)
Goods available for sale – Excluding beginning inventory250,000540,000
Goods available for sale – Including beginning inventory310,230670,000
Less:  Net sales (600,000)
Estimated ending inventory at retail for 2020 $70,000

Table (2)

Step 2:  Calculate ending inventory at retail at base-year prices.

Ending inventory at retail at base-year prices }=[ Ending inventory at retail×(Price index on 1/1/19Price index on 31/12/20)]=[ $70,000×(100115)]=$60,870

Step 3: Calculate inventory change at retail at base year prices.

Inventory change at retail at base-year prices}(Ending inventory at retail at base-year prices for 2020Ending inventory at retail at base-year prices for 2019)=($60,870$120,370)=$59,500

Step 4: Calculate the total change at relevant current costs.

(i)

Calculate the change at relevant current costs for 2019 (2019 layer).

Change at relevant current costs =[Inventory change at retail at base-year prices×(Price index on 31/12/19Price index on 1/1/19)×Cost-to-retail ratio]=[$20,370×(108100)×

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