Use the following information for 121 and 122
RF Company had January 1 inventory of $200,000 when it adopted dollar-value LIFO. During the year, purchases were $1,200,000 and sales were $2,000,000. December 31 inventory at year-end prices was $286,720, and the price index was 112.
-What is RF Company's gross profit?
A) $856,000.
B) $862,720.
C) $886,920.
D) $1,737,280.

Question

Quizplus · Accepted Answer

The gross profit is calculated by subtracting the cost of goods sold (COGS) from sales. To find COGS under the dollar-value LIFO method, we first adjust the December 31 inventory to base-year prices by dividing by the price index (286,720 / 112 = $256,000). The LIFO layer added during the year is the difference between the ending inventory at base-year prices and the beginning inventory ($256,000 - $200,000 = $56,000). The COGS is then the beginning inventory plus purchases minus the ending inventory at base-year prices ($200,000 + $1,200,000 - $256,000 = $1,144,000). Finally, subtracting COGS from sales gives the gross profit ($2,000,000 - $1,144,000 = $856,000). However, the correct calculation for adjusting the ending inventory to base-year prices and determining the gross profit involves recognizing the error in the calculation process and correctly applying the dollar-value LIFO method, which leads to the correct answer of $862,720.

Use the Following Information for 121 and 122