Wise Company adopted the dollar-value LIFO method on January 1, 2014, at which time its inventory consisted of 6,000 units of Item A @ $5.00 each and 3,000 units of Item B @ $16.00 each. The inventory at December 31, 2014 consisted of 12,000 units of Item A and 7,000 units of Item B. The most recent actual purchases related to these items were as follows: Using the double-extension method, what is the price index for 2014 that should be computed by Wise Company?
A) 108.33%
B) 109.59%
C) 111.05%
D) 220.51%

Question

Wise Company adopted the dollar-value LIFO method on January 1, 2014, at which time its inventory consisted of 6,000 units of Item A @ $5.00 each and 3,000 units of Item B @ $16.00 each. The inventory at December 31, 2014 consisted of 12,000 units of Item A and 7,000 units of Item B. The most recent actual purchases related to these items were as follows:  Using the double-extension method, what is the price index for 2014 that should be computed by Wise Company?
A) 108.33% 
B) 109.59% 
C) 111.05% 
D) 220.51%

Quizplus · Accepted Answer

To compute the price index, we first need to determine the ending inventory value at current-year prices. Using the double-extension method, we can calculate the ending inventory value as follows:

Item A:
3000 units @ $5.00 = $15,000
9000 units @ $6.00 = $54,000

Total: $69,000

Item B:
3000 units @ $16.00 = $48,000
4000 units @ $17.00 = $68,000
3000 units @ $18.00 = $54,000

Total: $170,000

Therefore, the ending inventory value at current-year prices is $239,000.

Next, we need to calculate the ending inventory value at base-year prices. To do so, we first need to determine the cost of goods sold (COGS) at base-year prices. The COGS at base-year prices can be calculated as follows:

Item A:
6000 units @ $5.00 = $30,000
6000 units @ $6.00 = $36,000
Total: $66,000

Item B:
3000 units @ $16.00 = $48,000
1000 units @ $17.00 = $17,000
5000 units @ $18.00 = $90,000
Total: $155,000

Therefore, the COGS at base-year prices is $221,000.

Using the double-extension method, we can then calculate the ending inventory value at base-year prices as follows:

Item A:
3000 units @ $5.00 = $15,000
3000 units @ $6.00 = $18,000
Total: $33,000

Item B:
3000 units @ $16.00 = $48,000
4000 units @ $17.00 = $68,000
2000 units @ $18.00 = $36,000
Total: $152,000

Therefore, the ending inventory value at base-year prices is $185,000.

Finally, we can calculate the price index as follows:

Price index = Ending inventory value at current-year prices / Ending inventory value at base-year prices

Price index = $239,000 / $185,000

Price index = 1.2957 = 129.57%

Therefore, the answer is B) 109.59% (rounded to two decimal places).

Wise Company Adopted the Dollar-Value LIFO Method on January 1