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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Johnson Corporation had beginning inventory of $20,000 at cost and $35,000 at retail. During the year, it made net purchases of $180,000 at cost and $322,000 at retail. Johnson nude sales of $300,000. Assuming a price index of 100 at the beginning of the year and 110 at the end of the year, compute Johnson’s ending inventory at cost using the dollar-value LIFO retail method.

To determine

Calculate the cost of ending inventory using the 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.

In LIFO retail method, the ending inventory includes the beginning inventory plus the current year’s layer or current period’s layer. To estimate LIFO from retail prices, the dollar-value LIFO retail method combines the dollar-value LIFO method and LIFO retail method when the price level has changed.

Calculate the cost of ending inventory using the dollar-value LIFO retail method.

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

DetailsCost ($)Retail ($)
Beginning inventory20,00035,000
Add: Purchase180,000322,000
Goods available for sale200,000357,000
Less:  Net sales (300,000)
Estimated ending inventory at current year retail prices $57,000

Table (1)

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

(i)

Calculate ending inventory retail at base-year price.

Retail price converted to base-year prices }=[ Ending inventory at retail×(Price index on beginningPrice index on ending)]=[$57,000×(100110)]=$51,818

(ii)

Calculate increase in retail inventory at base-year prices.

Increase in retail inventory at base-year prices }(Retail price converted to base-year priceBeginning inventory at retail)=($51,818$35,000)=$16,818

Step 3: Calculate ending inventory at retail in base year price to current-year retail prices

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