Question

On January 1, 2017, Bonanza Wholesalers Inc. adopted the dollar-value LIFO inventory method for income tax and external financial reporting purposes. However, Bonanza continuedto use the FIFO inventory method for internal accounting and management purposes. In applying the LIFO method, Bonanzauses internal conversion price indexes and the multiple pools approach under which substantially identical inventory items aregrouped into LIFO inventory pools. The following data were available for inventory pool no. 1, which comprises products A andB, for the 2 years following the adoption of LIFO.

FIFO Basis per Records

Unit Total

Units Cost Cost

Inventory, 1/1/17

Product A 10,000 \(30 \)300,000

Product B 9,000 25 225,000

\(525,000

Inventory, 12/31/17

Product A 17,000 36 \)612,000

Product B 9,000 26 234,000

\(846,000

Inventory, 12/31/18

Product A 13,000 40 \)520,000

Product B 10,000 32 320,000

$840,000

Instructions

(a) Prepare a schedule to compute the internal conversion price indexes for 2017 and 2018. Round indexes to two decimal places.

(b) Prepare a schedule to compute the inventory amounts at December 31, 2017 and 2018, using the dollar-value LIFO inventory method.

Short answer

The price index for A and B

2017 120 104

2018 133 128

The ending inventory at dollar value LIFO for A and B is $409,172.4 and $257,000, respectively.

Step-by-step solution

Schedule of price index

	Current cost of inventory	/	Base cost of inventory	=	Price Index
For Product A, Beg	$30	/	$30	=	1 or 100%
2017	$36	/	$30	=	1.2 or 120%
2018	$40	/	$30	=	1.33 or 133%
For Product B, Beg	$25	/	$25	=	1 or 100%
2017	$26	/	$25	=	1.04 or 104%
2018	$32	/	$25	=	1.28 or 128%

Ending inventory for the period at base year cost

$$\begin{gathered} \mathrm{For}\mathrm{Product}\mathrm{A}\left(2017\right)=\frac{\mathrm{Ending}\mathrm{Inventory}}{\mathrm{Price}\mathrm{Index}} \\ =\frac{612,000}{1·2} \\ =\$510,000 \end{gathered}$$

$$\begin{gathered} \mathrm{For}\mathrm{Product}\mathrm{A}\left(2018\right)=\frac{\mathrm{Ending}\mathrm{Inventory}}{\mathrm{Price}\mathrm{Index}} \\ =\frac{\$520,000}{1·33} \\ =\$390,977 \end{gathered}$$

$$\begin{gathered} \mathrm{For}\mathrm{Product}\mathrm{B}\left(2017\right)=\frac{\mathrm{Ending}\mathrm{Inventory}}{\mathrm{Price}\mathrm{Index}} \\ =\frac{234,000}{1·04} \\ =\$225,000 \end{gathered}$$

$$\begin{gathered} \mathrm{For}\mathrm{Product}\mathrm{B}\left(2018\right)=\frac{\mathrm{Ending}\mathrm{Inventory}}{\mathrm{Price}\mathrm{Index}} \\ =\frac{320,000}{1.28} \\ =\$250,000 \end{gathered}$$

Inventory value at dollar value LIFO

For Product A

	Ending inventory at base year prices	Layer at base year prices	X	Price index (percent)	=	Dollar value LIFO
2016	$300,000	$300,000	X	100	=	$300,000
2017	$510,000	$90,977	X	120	=	$109,172.4
2018	$390,977
Total						$409,172.4

For Product B

	Ending inventory at base year prices	Layer at base year prices	X	Price index (percent)	=	Dollar value LIFO
2016	$225,000	$225,000	X	100	=	$225,000
2017	$225,000	0	X	104	=	0
2018	$250,000	$25,000	X	128	=	$32,000
Total						$257,000