Question

Brock Co. adopted the dollar-value LIFO inventory method as of January 1, Year 6. A single inventory pool and an internally computed price index are used to compute Brock’s LIFO inventory layers. Information about Brock’s dollar-value inventory follows: Inventory At Base- At Current- At Dollar- Date Year Cost Year Cost Value LIFO 1/1/Yr 6 $40,000 $40,000 $40,000 Year 6 layer 5,000 14,000 6,000 12/31/Yr 6 $45,000 $54,000 $46,000 Year 7 layer 15,000 26,000 ? 12/31/Yr 7 $60,000 $80,000 ? What was Brock’s dollar-value LIFO inventory at December 31, Year 7?

Answer 1

Answer:

When using dollar-value LIFO, the ending inventory at current year cost must first be converted to base year cost. The 12/31/Y2 inventory at base year cost is given as $60,000. Since the 12/31/Y1 inventory at base year cost was $45,000 ($40,000 base layer and $5,000 year 1 layer), a new layer of $15,000 was added in year 2 ($60,000 − $45,000). This layer must be restated using the year 2 price index. The year 2 price index is computed using the double-extension technique, as illustrated below.