Question E9-26 - Intermediate Accounting (Kieso)

Question

You assemble the following information for Seneca Department Store, which computes its inventory under the dollar-value LIFO method. Cost Retail Inventory on January 1, 2017 \(216,000 \)300,000 Purchases 364,800 480,000 Increase in price level for year 9% Instructions Compute the cost of the inventory on December 31, 2017, assuming that the inventory at retail is (a) \(294,300 and (b) \)365,150.

Step-by-Step Solution

Answer

1. The cost of inventory equals $194,400.
2. The cost of inventory equals $248,246.

Calculation of ending inventory at base year retail prices

a. The cost of ending inventory at base year retail price  is calculated as follows:

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Base} \mathrm{Year} \mathrm{Retail} \mathrm{Price}=\frac{\mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Retail} }{100\%+\mathrm{Percentage} \mathrm{Increase}} \\ =\frac{\$294,300}{100\%+9\%} \\ =\$270,000 \end{gathered}$$

 

Calculation of the cost to retail ratio of beginning inventory

The cost-to-retail ratio of beginning inventory is calculated as follows:

$$\begin{gathered} \mathrm{Cost} \mathrm{to} \mathrm{Retail} \mathrm{Ratio} \mathrm{of} \mathrm{Beginning} \mathrm{Inventory}=\frac{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$216,000}{\$300,000} \\ =72\% \end{gathered}$$

Calculation of the cost to retail ratio of total inventory excluding beginning inventory

The cost-to-retail ratio of total inventory excluding beginning inventory is calculated as follows:
$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio}=\frac{\mathrm{Total} \mathrm{Inventory} \mathrm{Excluding} \mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Total} \mathrm{Inventory} \mathrm{Excluding} \mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$364,800}{\$480,000} \\ =76\% \end{gathered}$$

Calculation of ending inventory under dollar-value-LIFO retail method

1. Ending inventory is calculated as follows: 

 

Ending Inventory at Base Year Retail Prices	Layers at Base Year Retail Prices			Price Index (Percentage)		Cost-to-Retail (Percentage)		Ending Inventory at LIFO Cost
$270,000	2016	$270,000	x	100%	x	72%	=	$194,400
								$194,400

Calculation of ending inventory at base year retail prices

The cost of ending inventory at base year retail price is calculated as follows:

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Base} \mathrm{Year} \mathrm{Retail} \mathrm{Price}=\frac{\mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}}{100\%+\mathrm{Percentage} \mathrm{Increase}} \\ =\frac{\$365,150}{100\%+9\%} \\ =\$335,000 \end{gathered}$$

 

Calculation of ending inventory under dollar-value-LIFO retail method

b. Ending inventory is calculated as follows: 

Ending Inventory at Base Year Retail Prices	Layers at Base Year Retail Prices			Price Index (Percentage)		Cost-to-Retail (Percentage)		Ending Inventory at LIFO Cost
$335,000	2016	$270,000	x	100%	x	72%	=	$194,400
	2017	65,000	x	109%	x	76%	=	53,846
								$248,246

 

Thus, the value of inventory in (a) equals $194,400 and in (b) equals $248,246.