Concept explainers
Calculate the cost of inventory destroyed in the fire if company using dollar-value LIFO retail method.
Explanation of Solution
Dollar-Value-LIFO: This method shows all the inventory figures at dollar price rather than units. Under this inventory method, the units that are purchased last are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.
Calculate the cost of inventory destroyed in the fire using dollar-value LIFO retail method:
For the year 2016:
Step 1: Calculate the amount of estimated ending inventory at retail.
G Company | ||
Ending Inventory Under DVL Retail Method | ||
For the Year 2016 | ||
Details | Cost ($) | Retail ($) |
Beginning inventory | 40,000 | 90,000 |
Add: Net purchase | 100,000 | 210,000 |
Net additional markups | 20,000 | |
Less: Net markdowns | 0 | (40,000) |
Goods available for sale – Excluding beginning inventory | 100,000 | 190,000 |
Goods available for sale – Including beginning inventory | 140,000 | 280,000 |
Less: Net sales | (200,000) | |
Estimated ending inventory at retail for 2016 | $80,000 |
Table (1)
Step 2: Calculate ending inventory at retail at base-year prices.
Step 3: Calculate inventory change at retail at base year prices.
Step 4: Calculate the change at relevant current costs.
Step 5: Calculate ending inventory at cost.
Hence, the ending inventory at cost for 2016 is$33,550.
Working note 1:
Calculate cost-to-retail ratio.
Working note 2:
Calculate cost-to-retail ratio.
For the year 2017:
Step 1: Calculate the amount of estimated ending inventory at retail.
G Company | ||
Ending Inventory Under DVL Retail Method | ||
For the Year 2017 | ||
Details | Cost ($) | Retail ($) |
Beginning inventory | 33,550 | 80,000 |
Add: Net purchase | 160,000 | 350,000 |
Net additional markups | 40,000 | |
Less: Net markdowns | (70,000) | |
Goods available for sale – Excluding beginning inventory | 160,000 | 320,000 |
Goods available for sale – Including beginning inventory | 193,550 | 400,000 |
Less: Net sales | (280,000) | |
Estimated ending inventory at retail for 2017 | $120,000 |
Table (2)
Step 2: Calculate ending inventory at retail at base-year prices.
Step 3: Calculate inventory change at retail at base year prices.
Step 4: Calculate the total change at relevant current costs.
Step 5: Calculate ending inventory at cost.
Hence, the ending inventory at cost for 2017 is$52,040.
Working note 1:
Calculate cost-to-retail ratio.
Calculate inventory lost in the fire:
Inventory Lost in the Fire | |
Particulars | Amount ($) |
Purchases in transit | 8,000 |
Undamaged goods salvaged | 5,000 |
Inventory after the fire | 13,000 |
Less: Inventorybefore the fire | (52,040) |
Inventory lost | $(39,040) |
Table (3)
Working note 1:
Calculate undamaged goods salvaged:
Therefore, the cost of inventory destroyed in the fire is $39,040.
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Chapter 8 Solutions
Intermediate Accounting: Reporting and Analysis
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