Question

The Lennon Company manufactures a single product. The company adopted the dollar value LIFO inventory method on Dec 21, 2010. More information concerning the company is below:

On Dec 31, 2010

Dollar Value LIFO inventory $30,900

Price Index at year end (the base year) 100%

Inventory info in succeeding years

Date               Inventory at YE FIFO Prices   Inflation Index

Dec 31, 2011                 $37,000                        1.15

Dec 31, 2012                 45300                           1.24

Dec 31, 2013                 42540                           1.35

Dec 31, 2014                 48,600                           1.30

Dec 31, 2015                 49,720 1.38

1. Compute the inventory value at Dec 31 of each year under the dollar value LIFO inventory method

2. Compute the amount of the adjustment to the LIFO Reserve each year

3. Prepare the journal entry to adjust the LIFO Reserve at the end of each year

Answer 1

Note: All amounts in $

Particulars	Inventory at end-of-year FIFO prices	Price index	Inventory at LIFO prices	Inventory at base year LIFO prices	Change from prior year
31-Dec-10	30900	1		30900	0
31-Dec-11	37000	1.15	37000*1/1.15	32174	1274
31-Dec-12	45300	1.24	45300*1/1.24	36532	4358
31-Dec-13	42540	1.35	42540*1/1.35	31511	-5021
31-Dec-14	48600	1.3	48600*1/1.3	37385	5874
31-Dec-15	49720	1.38	49720*1/1.38	36029	-1356

Inventory Values:
31-Dec-10	$
30900 @ 1.00	30900
31-Dec-11
30900 @ 1.00	30900
1274 @ 1.15	1465.1
	32365.1
31-Dec-12
30900 @ 1.00	30900
4358 @ 1.24	5403.92
	36303.92
31-Dec-13
30900 @ 1.00	30900
611 @ 1.24	757.64
	31657.64
31-Dec-14
30900 @ 1.00	30900
611 @ 1.24	757.64
5874 @ 1.3	7636.2
	39293.84
31-Dec-15
30900 @ 1.00	30900
611 @ 1.24	757.64
5129 @ 1.3	6667.7
	38325.34

Note: In 2013 and 2015, price index of previous year has been used as there is no layer during the year; i.e. the ending inventory at base price is less than the beginning inventory

LIFO reserve:	Inventory at FIFO	Inventory at LIFO	LIFO reserve (FIFO - LIFO)	Change in reserve
31-Dec-10	30900	30900	0
31-Dec-11	37000	32365.1	4634.9	4634.9
31-Dec-12	45300	36303.92	8996.08	4361.18
31-Dec-13	42540	31657.64	10882.36	1886.28
31-Dec-14	48600	39293.84	9306.16	-1576.2
31-Dec-15	49720	38325.34	11394.66	2088.5

	Journal entries:
Date	Account Title	Debit ($)	Credit ($)
31/12/2011	Cost of goods sold	4634.9
	LIFO reserve		4634.9
	To create LIFO reserve
31/12/2012	Cost of goods sold	4361.18
	LIFO reserve		4361.18
	To create LIFO reserve
31/12/2013	Cost of goods sold	1886.28
	LIFO reserve		1886.28
	To create LIFO reserve
31/12/2014	LIFO reserve	1576.2
	Cost of goods sold		1576.2
	To adjust LIFO reserve
31/12/2015	Cost of goods sold	2088.5
	LIFO reserve		2088.5
	To create LIFO reserve