Question E9-29 - Intermediate Accounting (Kieso)

Question

(Dollar-Value LIFO Retail) 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

The ending inventory for year 2016-2019 equals $61,250.40, $69,908.40, $59,437.80 and $74,662.80, respectively.

Calculation of cost to retail ratio of beginning inventory

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

$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio} \mathrm{of} \mathrm{Beginning} \mathrm{Inventory}=\frac{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$54,000}{\$100,000} \\ =54\% \end{gathered}$$

 

Calculation of ending inventory at base year retail prices

The cost of ending inventory at base year retail price for 2016 is calculated as follows:

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Base} \mathrm{Year} \mathrm{Retail} \mathrm{Price}=\frac{\mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}}{\mathrm{Price} \mathrm{Index}} \\ =\frac{\$118,720}{106\%} \\ =\$112,000 \end{gathered}$$

Calculation of ending inventory under dollar-value-LIFO retail method in 2016

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
$112,000	2015	$100,000	x	100%	x	54%	=	$54,000
	2016	12,000	x	106%	x	57%	=	7,250.40
								$61,250.40

 

Calculation of ending inventory at base year retail prices for the year 2017

The cost of ending inventory at base year retail price for 2017 is calculated as follows:

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Base} \mathrm{Year} \mathrm{Retail}\hspace{0.17em}\mathrm{Price}=\frac{\mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}}{\mathrm{Price} \mathrm{Index}} \\ =\frac{\$138,750}{111\%} \\ =\$125,000 \end{gathered}$$

 

Calculation of ending inventory under dollar-value-LIFO retail method in 2017

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
$125,000	2015	$100,000	x	100%	x	54%	=	$54,000
	2016	12,000	x	106%	x	57%	=	7,250.40
	2017	13,000	x	111%	x	60%	=	8,658
								$69,908.40

Calculation of ending inventory at base year retail prices for the year 2018

The cost of ending inventory at base year retail price for 2018 is calculated as follows:

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Base} \mathrm{Year} \mathrm{Retail} \mathrm{Price}=\frac{\mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}}{\mathrm{Price} \mathrm{Index}} \\ =\frac{\$125,350}{115\%} \\ =\$109,000 \end{gathered}$$

Calculation of ending inventory under dollar-value-LIFO retail method in 2018

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
$125,000	2015	$100,000	x	100%	x	54%	=	$54,000
	2016	9,000	x	106%	x	57%	=	5,437.80
								$59,437.80

 

Calculation of ending inventory at base year retail prices for the year 2019

The cost of ending inventory at base year retail price for 2019 is calculated as follows:

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Base} \mathrm{Year} \mathrm{Retail} \mathrm{Price}=\frac{\mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}}{\mathrm{Price} \mathrm{Index}} \\ =\frac{\$162,500}{125\%} \\ \$130,000 \end{gathered}$$

 

Calculation of ending inventory under dollar-value-LIFO retail method in 2019

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
$125,000	2015	$100,000	x	100%	x	54%	=	$54,000
	2016	9,000	x	106%	x	57%	=	5,437.80
	2017	21,000	x	125%	x	58%	=	15,225
								$74,662.80

 

Thus, inventory for year 2016, 2017, 2018, and 2019 equals $61,250.40, $69,908.40, $59,437.80, and $74,662.80, respectively.