Question

Terry company had january 1 inventory of $100,000 when it adopted dollar-value lifo. during the year, purchases were $600,000 and sales were $1,000,000. december 31 inventory at year-end prices was $143,360, and the price index was 112 (price index for base year = 100). what is terry’s ending inventory and gross profit, respectively

Answer 1

Answer:

Terry's Closing Inventory is $131,360.

Terry's Gross profit is $431,360.

We follow these steps to arrive at the answers:

1. Calculate the base value of closing inventory (CI):

$CI_{base value} = \frac{CI*Index at base year}{current price index}$

$CI_{base value} = \frac{143360*100}{112} = 128,000$

2. Calculate additions to inventory at base price

$Additions to inventory = CI_{base value} - Beginning inventory$

$Additions to inventory = 128000 - 100000 = 28,000$

3. Calculate the value of additions to inventory at current prices

$Additions to inventory_{current Value} = Additions to inventory_{base Value} * \frac{current price index}{base price index}$

$Additions to inventory_{current Value} = 28,000 * \frac{112}{100} = 31,360$

4. Calculate the value of Closing inventory

$Closing inventory = Beginning Inventory + Additions to inventory_{current Value}$

$Closing inventory = 100,000 + 31,360 = 131,360$

5. Compute Cost of Goods Sold (COGS):

$COGS = Opening Inventory + Purchases - Closing Inventory$

$COGS = (100000 + 600000 - 131360) = 568640$

6. Compute Gross profit

$Gross profit = Sales - COGS$

$Gross profit = 1000000 - 568640 = 431360$