Question

When the double-extension approach to the dollar-value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number.
Which of the following correctly states how components are used in the calculation of this index number?

a. In the numerator, the average of the ending inventory at base year cost and at current year cost.
b. In the numerator, the ending inventory at current year cost, and, in the denominator, the ending inventory at base year cost.
c. In the numerator, the ending inventory at base year cost, and, the denominator, the ending inventory at current year cost.
d. In the denominator, the average of the ending inventory at base year cost and at current year cost.

Answer 1

Answer:

(b) In the numerator, the ending inventory at current year cost, and, in the denominator, the ending inventory at base year cost.

Explanation:

(b) is the correct answer because the index number used is calculated as

Index = $\frac{ending-inventory-at-current-year-cost}{ending-inventory-at-base-year-cost.}$

This index describes the relationship between current and base year price. when multiplied by a new layer i.e increase in base year dollars, it will give current year dollars.