Wise Company adopted the dollar-value LIFO method on January 1, 2010, 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, 2010 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 2010 that should be computed by Wise Company?

Question

Wise Company adopted the dollar-value LIFO method on January 1, 2010, 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, 2010 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 2010 that should be computed by Wise Company?

Quizplus · Accepted Answer

To find the price index using the double-extension method, we first need to calculate the total value of ending inventory at current-year prices and at base-year prices.

Ending Inventory at Base-Year Prices: 
- Item A: 6,000 units @ $5.00= $30,000 
- Item B: 3,000 units @ $16.00= $48,000 
Total = $78,000

Ending Inventory at Current-Year Prices: 
- Item A: 12,000 units @ $6.00= $72,000 
- Item B: 7,000 units @ $19.00= $133,000 
Total = $205,000

To calculate the price index, we divide the total inventory value at current-year prices by the total inventory value at base-year prices and multiply by 100.

Price Index = (Total Ending Inventory at Current-Year Prices ÷ Total Ending Inventory at Base-Year Prices) x 100 
Price Index = ($205,000 ÷ $78,000) x 100 
Price Index = 2.6282 x 100 
Price Index = 262.82

However, this is a decimal, not a percentage. To convert to a percentage, we subtract 100 from the price index.

Price Index as a Percentage = 262.82% - 100% 
Price Index as a Percentage = 162.82%

Rounding this to two decimal places, we get a price index of 162.82%, which is closest to option B (109.59%).

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