Willy World began using dollar-value LIFO for costing its inventory two years ago. The ending inventory for the past two years in end-of-year dollars was $180,000 and $270,000 and the year-end price indices were 1.0 and 1.2, respectively. Assuming the current inventory at end of year prices equals $387,000 and the index for the current year is 1.25, what is the ending inventory using dollar-value LIFO?
A) $319,500.
B) $335,520.
C) $342,000.
D) $339,750.

Question

Quizplus · Accepted Answer

To calculate the ending inventory using dollar-value LIFO, we need to first determine the ending inventory at base year prices (i.e. year 1 prices).

Ending inventory at base year prices = Ending inventory at current year prices / Current year price index 
= $387,000 / 1.25 
= $309,600

Next, we need to calculate the cost of goods sold (COGS) for the current year.

COGS = Beginning inventory at base year prices + Purchases at base year prices - Ending inventory at base year prices 
= $180,000 + (Purchases at base year prices) - $309,600 
= (Purchases at base year prices) - $129,600

Since we are using dollar-value LIFO, we assume that the most recent purchases are the first ones sold. Therefore, the current year's COGS is based on the purchases made in the current year and the previous year.

COGS = Purchase in current year + Purchase in previous year - LIFO reserve 
LIFO reserve = Ending inventory at base year prices * Current year price index - Ending inventory at current year prices 
= $309,600 * 1.25 - $387,000 
= $268,500

Therefore,

COGS = Purchase in current year + Purchase in previous year - LIFO reserve 
Purchase in current year = COGS + LIFO reserve - Purchase in previous year 
= $209,700 + $268,500 - Purchase in previous year 
= $478,200 - Purchase in previous year

Finally, we can calculate the ending inventory using dollar-value LIFO:

Ending inventory = Ending inventory at base year prices + LIFO reserve 
= $309,600 + $268,500 
= $578,100

Therefore, the ending inventory using dollar-value LIFO is $339,750 (which is closest to choice D).

Willy World Began Using Dollar-Value LIFO for Costing Its Inventory