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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 Intella Inc. adopted the dollar-value retail LIFO method on January 1, 2018. The following data apply to the 4 subsequent years:

Chapter 8, Problem 11P, Dollar-Value LIFO Retail Intella Inc. adopted the dollar-value retail LIFO method on January 1, , example  1

In addition, the following price indexes are available:

Chapter 8, Problem 11P, Dollar-Value LIFO Retail Intella Inc. adopted the dollar-value retail LIFO method on January 1, , example  2

Required:

Compute the inventory at the end of each of the 4 years. Round the cost-to-retail ratio to 3 decimal places.

To determine

Calculate the cost of ending inventory for 2018, 2019, 2020, and 2021 years by using dollar-value LIFO retail 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 2018, 2019, 2020, and 2021 years by using dollar-value LIFO retail method:

For the year 2018:

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

I Incorporation
Ending Inventory Under DVL Retail Method
For the Year 2018
DetailsCost ($)Retail ($)
Beginning inventory40,00080,000
Add:  Net purchase85,500190,000
Goods available for sale – Excluding beginning inventory85,500190,000
Goods available for sale – Including beginning inventory125,500270,000
Less:  Net sales (200,000)
Estimated ending inventory at retail for 2018 $70,000

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 1/1/18Price index on 31/12/18)]=[ $70,000×(100105)]=$66,667

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)=($66,667$80,000)=$13,333

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

Change at retail at relevant current costs =[Inventory change at retail at base-year prices×(Price index on 1/1/18Price index on 1/1/18)]=[$13,333×(100100)]=$13,333

Step 5: Calculate the change at relevant current costs.

Change at relevant current costs =[Change at retail at relevant current costs××Cost-to-retail ratio]=[$13,333×.50]=$6,667

Step 6: Calculate ending inventory at cost.

Ending inventory at cost = (Beginning inventory for 2018 Change at relevant current costs)=[$40,000$6,667]=$33,333

Hence, the ending inventory at cost for 2018 is $33,333.

Working note 1:

Calculate cost-to-retail ratio.

Cost-to-retail ratio= (Beginning inventory for costBeginning inventory for retail)=($40,000$80,000)=.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)=($85,500$190,000)=.45

For the year 2019:

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

I Incorporation
Ending Inventory Under DVL Retail Method
For the Year 2019
DetailsCost ($)Retail ($)
Beginning inventory33,33370,000
Add:  Net purchase92,000230,000
Goods available for sale – Excluding beginning inventory92,000230,000
Goods available for sale – Including beginning inventory125,333300,000
Less:  Net sales (210,000)
Estimated ending inventory at retail for 2019 $90,000

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 1/1/18Price index on 31/12/19)]=[ $90,000×(100110)]=$81,818

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 2019Ending inventory at retail at base-year prices for 2018)=($81,818$66,667)=$15,151

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

Change at retail at relevant current costs =[Inventory change at retail at base-year prices×(Price index on 31/12/19Price index on 1/1/18)]=[$15,151×(110100)]=$16,666

Step 5: Calculate the change at relevant current costs.

Change at relevant current costs =[Change at retail at relevant current costs××Cost-to-retail ratio]=[16,666×.40]=$6,666

Step 6: Calculate ending inventory at cost.

Ending inventory at cost = (Beginning inventory for 2019 +Change at relevant current costs)=[$33,333+$6,666]=$39,999

Hence, the ending inventory at cost for 2019 is $39,999.

Working note 1:

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)=($92,000$230,000)=

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