Question

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C8-1 LCM, Dollar-Value LIFO, and Consignments Caddell Company, a wholesaler, purchases its inventories from various suppliers FOB destina- LO 8.1 AICPA Adapted tion. It incurs substantial warehousing costs. Cad- dell uses the dollar-value LIFO inventory cost flow method. Caddell also consigns some of its inventories to Reed Company. Reed also has items for sale that it purchases from other wholesalers. Reed uses the lower of FIFO cost or market inventory method. Required: 1. When are the purchases from various suppliers generally included in Caddell's inventory? Why? 2. Theoretically, how should Caddell account for the warehousing costs? Why? 3. a Explain the advantages of using the dollar-value LIFO inventory cost flow method as opposed to the conventional quantity of goods LIFO method. b. How does the calculation of dollar-value LIFO differ from the conventional quan- tity of goods method? Explain how Caddell should account for the inventories consigned to Reed Company. 4.

Answer 1

1. The purchases from various suppliers are included in the caddells inventory when the goods are received at his warehouse. This is because, the terms of purchase are FOB destination, and the ownership will be transferred only after the goods are received at his warehouse.
2. The best method for caddell to account for the warehousing costs would be treating the same as inventory costs, because as a wholesaler all their warehousing would be directly attributable to the finished goods itself and the costs incurred would be related to delivering and handling the goods.
3. a. Dollar value LIFO method method is advantageous as opposed to conventional quantity of goods LIFO method because of the following reasons.
   1. As the pools are determined and measured in terms of total dollar value, this method allows companies to include a broader range of goods in a pool.
   2. Under specific goods pooled LIFO approach, an item can be replaced only with an item that is substantially identical whereas in a dollar-value LIFO pool, an item can be replaced with an item that is similar in use or interchangeable.

3. b. In quantity of goods method, the value of inventory is calculated using the cost per unit from reverse end, which is not that complex, whereas calculation of inventory under Dollar value LIFO method involves a series of steps, it can be understood easily with the below example

December 31, 2011(end of year prices): $40,000

December 31, 2012 (end of year prices): $52,800

The inventory prices were increased by 25% during the year 2012.

Now the computation will be as follows,

First of all, we need to compute the value of ending inventory at base-year-prices. It is computed using the following formula:

Ending inventory at base-year-prices = $52,800/1.25

= $42,240

Now we can compute the real-dollar quantity increase in inventory:

= ($42,240 – $40,000)

= $2,240

The next step is to value this real dollar quantity increase in inventory at year-end-prices:

= $2,240 × 1.25

= $2,800

4. Under consignment basis, the revenue should be recognised only after the goods are actually sold by the consignee and not when the goods are sent to consignee, therefore caddell should account for the goods sent on consignment to Reed company, only when the goods are sold by Reed company, till then it will be continued under closing inventory under the head goods sent on consignment.