Chapter 9, Problem 9.9P

To determine

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.

To Estimate: the ending inventory and cost of goods sold in 2016 using dollar-value LIFO retail method.

Explanation of Solution

Calculate the amount of estimated ending inventory and cost of goods sold at retail.

Details	Cost ($)	Retail ($)
Beginning inventory	28,000	40,000
Add: Net purchase	85,000	108,000
Freight-in	2,000
Net markups		10,000
Less: Net markdowns		(2,000)
Goods available for sale – Excluding beginning inventory	87,000	116,000
Goods available for sale – Including beginning inventory	115,000	156,000
Less: Net sales	0	(102,400)
Employees discounts		(600)
Estimated ending inventory at current year retail prices		53,000
Estimated ending inventory at cost (Refer Table 2)	(35,950)
Estimated Cost of Goods Sold	79,050

Table (1)

Working Notes:

Calculate base layer cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Base layer cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Beginning inventory at cost}}{\text{Beginning inventory at retail}}\times 100\right)\\ =\left(\frac{\$28,000}{\$40,000}\times 100\right)\\ =70\%\end{array}$

Calculate current year cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\$87,000}{\$116,000}\times 100\right)\\ =75\%\end{array}$

Calculate the amount of estimated ending inventory at cost.

Ending inventory at dollar-value LIFO retail cost
Ending inventory at year-end retail prices ($)	Ending inventory at base year retail prices ($)	Inventory layers at base year retail prices ($)	Inventory layers converted to cost ($)
53,000	50,000	40,000 (Base)	28,000
		10,000 (2016)	7,950
Total ending inventory at dollar-value LIFO retail cost			35,950

Table (2)

Calculate the amount of ending inventory at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Ending inventory }\\ \text{at base year retail prices }\end{array}\}\text{= }\left(\frac{\text{Estimated ending inventory at retail}}{\text{Retail price index}}\right)\\ =\left(\frac{\$53,000}{1.06}\right)\\ =\$50,000\end{array}$

Calculate the amount of inventory layers at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ base year retail prices }\end{array}\}\text{= Beginning inventory at retail}\\ \text{=\$40,000}\end{array}$

Calculate the amount of inventory layers at current year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ current year retail prices (2016) }\end{array}\}\text{= }\left(\begin{array}{l}\text{Ending inventory at base year retail prices}\\ -\text{Beginning inventory at retail}\end{array}\right)\\ =\$53,000-\$40,000\\ =\$13,000\end{array}$

Calculate the amount of inventory layers converted to cost (Base).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Beginning inventory at retail}\times \\ \text{Base price index}\times \\ \text{Base layer cost-to retail percentage}\end{array}\right)\\ =\left(\$40,000\times 1.00\times 70\%\right)\\ =\$28,000\end{array}$

Calculate the amount of inventory layers converted to cost (2016).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at current year retail prices}\times \\ \text{Retail price index}\times \\ \text{Current year cost-to retail percentage}\end{array}\right)\\ =\left(\$10,000\times 1.06\times 75\%\right)\\ =\$7,950\end{array}$

To determine

To Estimate: the ending inventory and cost of goods sold in 2017 using dollar-value LIFO retail method.

Explanation of Solution

Calculate the amount of estimated ending inventory and cost of goods sold at retail.

Details	Cost ($)	Retail ($)
Beginning inventory	35,950	53,000
Add: Net purchase	90,000	114,000
Freight-in	2,500
Net markups		8,000
Less: Net markdowns		(2,200)
Goods available for sale – Excluding beginning inventory	92,500	119,800
Goods available for sale – Including beginning inventory	128,450	172,800
Less: Net sales	0	(108,000)
Employees discounts		(1,000)
Estimated ending inventory at current year retail prices		63,800
Estimated ending inventory at cost (Refer Table 2)	(42,744)
Estimated Cost of Goods Sold	85,706

Table (3)

Working Notes:

Calculate base layer cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Base layer cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Beginning inventory at cost}}{\text{Beginning inventory at retail}}\times 100\right)\\ =\left(\frac{\$28,000}{\$40,000}\times 100\right)\\ =70\%\end{array}$

Calculate 2016 year cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\$87,000}{\$116,000}\times 100\right)\\ =75\%\end{array}$

Calculate current year cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\$92,500}{\$119,800}\times 100\right)\\ =77.21\%\end{array}$

Calculate the amount of estimated ending inventory at cost.

Ending inventory at dollar-value LIFO retail cost
Ending inventory at year-end retail prices ($)	Ending inventory at base year retail prices ($)	Inventory layers at base year retail prices ($)	Inventory layers converted to cost ($)
63,800	58,000	40,000 (Base)	28,000
		10,000 (2016)	7,950
		8,000 (2017)	6,794
Total ending inventory at dollar-value LIFO retail cost			42,744

Table (4)

Calculate the amount of ending inventory at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Ending inventory }\\ \text{at base year retail prices }\end{array}\}\text{= }\left(\frac{\text{Estimated ending inventory at retail}}{\text{Retail price index}}\right)\\ =\left(\frac{\$63,800}{1.10}\right)\\ =\$58,000\end{array}$

Calculate the amount of inventory layers at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ base year retail prices }\end{array}\}\text{= Beginning inventory at retail}\\ \text{=\$40,000}\end{array}$

Calculate the amount of inventory layers at current year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ current year retail prices (2016) }\end{array}\}\text{= }\left(\begin{array}{l}\text{Ending inventory at base year retail prices}\\ -\text{Beginning inventory at retail}\end{array}\right)\\ =\$63,800-\$40,000\\ =\$23,800\end{array}$

Calculate the amount of inventory layers converted to cost (Base).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Beginning inventory at retail}\times \\ \text{Base price index}\times \\ \text{Base layer cost-to retail percentage}\end{array}\right)\\ =\left(\$40,000\times 1.00\times 70\%\right)\\ =\$28,000\end{array}$

Calculate the amount of inventory layers converted to cost (2016).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at 2016 year retail prices}\times \\ \text{Retail price index}\times \\ \text{2016 year cost-to retail percentage}\end{array}\right)\\ =\left(\$10,000\times 1.06\times 75\%\right)\\ =\$7,950\end{array}$

Calculate the amount of inventory layers converted to cost (2017).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at current year retail prices}\times \\ \text{Retail price index}\times \\ \text{Current year cost-to retail percentage}\end{array}\right)\\ =\left(\$8,000\times 1.10\times 77.21\%\right)\\ =\$6,794\end{array}$