Question

Richardson Company cans a variety of vegetable-type soups. Recently, the company decided to value its inventories using dollar-value LIFO pools. The clerk who accounts for inventories does not understand how to value the inventory pools using this new method, so, as a private consultant, you have been asked to teach him how this new method works. He has provided you with the following information about purchases made over a 6-year period.
Ending Inventory
Date (End-of-Year Prices) Price Index
Dec, 31,2010 $80,000 100
Dec. 31, 2011 111,300 105
Dec. 31, 2012 108,000 120
Dec. 31, 2013 128,700 130
Dec. 31, 2014 147,000 140
Dec. 31, 2015 174,000 145
You have already explained to him how this inventory method is maintained, but he would feel better about it if you were to leave him detailed instructions explaining how these calculations are done and why he needs to put all inventories at a base-year value.
Instructions:
A. Compute the ending inventory for Richardson Company for 2010 through 2015 using dollar -value LIFO.
B. Using your computation schedules as your illustration, write a step-by-step set of instructions explaining how the calculations are done.Begin your explanation by briefly explaining the theory behind this inventory method, including the purpose of putting all amounts into base - period levels.

Answer 1

Answer:

Richardson Company

A. Ending inventory for 2010 through 2015 using dollar-value LIFO:

Date                 (End-of-Year Prices)    Price    Dollar value LIFO

                                                            Index

Dec, 31,2010             $80,000             100       $80,000

Dec. 31, 2011                111,300             105        106,000

Dec. 31, 2012             108,000             120         90,000

Dec. 31, 2013             128,700             130          99,000

Dec. 31, 2014             147,000             140        105,000

Dec. 31, 2015             174,000             145        120,000

B. Companies use the dollar-value LIFO method to determine their ending inventory values based on year-to-year changes to the dollar value of the inventories after including the effects of inflation.  To determine the dollar-value LIFO of inventory, take the end of the year inventory price and divide it by its price index and multiply by the base year index.  This process removes the effect of inflation on the value of the ending inventory.

Explanation:

a) Data and Calculations:

Ending Inventory

Date                 (End-of-Year Prices)    Price    Dollar value LIFO

                                                            Index

Dec, 31,2010             $80,000             100       $80,000 ($80,000*100/100)

Dec. 31, 2011                111,300             105        106,000 ($111,300*100/105)

Dec. 31, 2012             108,000             120         90,000 ($108,000*100/120)

Dec. 31, 2013             128,700             130          99,000 ($128,700*100/130)

Dec. 31, 2014             147,000             140        105,000 ($147,000*100/140)

Dec. 31, 2015             174,000             145        120,000 *$174,000*100/145)