Question

Acute Company manufactures a single product. On December 31, 2019, Acute adopted the dollar-value LIFO inventory method. It computes it’s inventory on that date using the dollar value LIFO inventory method as $320,000. Inventory data for the succeeding years is as follows:

Year Ending Inventory Price Index

(End of Year Price) (Base Year 2019)

2020    380,000    1.10

2021     440,000 1.20

2022 450,000 1.25

Instructions:

a. Compute the ending inventory using dollar value to compute the balances for 2019 to 2022, including the LIFO reserve. You must show supporting computations.

b. Prepare the journal entry for 2020 record the LIFO Reserve.

Answer 1

SOLUTION :

a.

Ending Inventory using dollar value LIFO method

31-Dec-19		$
320000 @ 1.00		320000
31-Dec-20
320000 @ 1.00		320000
25456 @ 1.10		28001.6
		348001.6
31-Dec-21
320000 @ 1.00		320000
25456 @ 1.10		28001.6
21212 @ 1.20		25454.4
		373456
31-Dec-22
320000 @ 1.00		320000
25456 @ 1.10		28001.6
21212 @ 1.20		25454.4
40000 @ 1.20*		48000
		421456

LIFO Reserve

Year End	LIFO Reserve
31-Dec-19	0.0
31-Dec-20	31998.4
31-Dec-21	66544
31-Dec-22	28544

b.

Journal entry for 2020 record the LIFO Reserve

Date	Account Titles & Explanation	Debit $	Credit $
31-Dec-20	Cost of Inventory Sold	32000
	LIFO Reserve Account		32000
	(Being entry made to adjust the
	amount of LIFO Reserve against
	Cost of Inventory Sold)

NOTES :

Year End	Year End Prices	Price Index Percentage	Base Year Prices	Change in Inventory
31-Dec-19	320000	100	320000.0	0.0
31-Dec-20	380000	110	345454.5	25454.5
31-Dec-21	440000	120	366666.7	21212.1
31-Dec-22	450000	125	360000.0	-6666.7

* A layer is formed when inventory at base year price in the given year is increased when compared to that of previous year. Since there is no layer is formed in 2022, the Price Index Percentage of 2021 has been applied.

LIFO Reserve

It is the change in inventory at FIFO method and in LIFO method. Here it is assumed that inventory at base prices is FIFO inventory cost. It will reduce the cost of inventory sold. Therefore, the adjusting journal entry is made by a debit to cost of inventory sold.