Richardson Company cans a variety of vegetable-type soups. Recently, the company

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.

Date

Ending Inventory
(End-of-Year Prices)

Price Index

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.

Compute the ending inventory for Richardson Company for 2010 through 2015 using dollar-value LIFO.

$

Date

Ending Inventory
(End-of-Year Prices)

Price Index

Dec. 31, 2010 $78,200 100 Dec. 31, 2011 149,209 131 Dec. 31, 2012 149,850 150 Dec. 31, 2013 175,932 162 Dec. 31, 2014 207,060 174 Dec. 31, 2015 242,540 181

Explanation / Answer

Step 1. calculate value if ending inventory of current year at base year price :

            = Value of current year’s ending inventory / Price index of current year

            Year 2010          (78200 / 100) x 100        = 78200

            Year 2011          (149209 / 131) x 100      = 113900

            Year 2012          (149850 / 150) x 100      = 99900

            Year 2013          (175932 / 162) x 100      = 108600

            Year 2014          (207060 / 174) x 100      = 119000

            Year 2015          (242540 / 181) x 100      = 134000

Step 2. Calculate quantity increase or decrease in real dollar terms :

            = Current ending inventory – last year’s ending inventory

            Year 2010                                  0

            Year 2011          113900 – 78200 = 35700

            Year 2012          99900 – 113900 = -14000

            Year 2013          108600 – 99900 = 8700

            Year 2014          119000 – 108600 = 10400

            Year 2015          134000 – 119000 = 15000

Step 3. Convert real dollar quantity increase/decrease at current year prices :

            = quantity increase or decrease in real dollar terms x current year’s price index

            Year 2010                                  0

            Year 2011          35700 x 131/100 = 46767

            Year 2012          -14000 x 131/100 = -18340 (it’s a negative value so we will use last year’s index)

            Year 2013          8700 x 162/100 = 14094

            Year 2014          10400 x 174/100 = 18096

            Year 2015          15000 x 181/100 = 27150

Step 4. Calculate ending inventory

            = last year’s ending inventory +/- real dollar quantity

            Year 2010          78200 + 0         = 78200

            Year 2011          78200 + 46767 = 124967

            Year 2012          124967 – 18340 = 106627

            Year 2013          106627 + 14094 = 120721

            Year 2014          120721+ 18096 = 138817

            Year 2015          138817 + 27150 = 165967

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