Question

Dalton Company adopted the dollar-value LIFO inventory method on January 1, 2016. In applying the LIFO method, Dalton uses internal price indexes and the multiple-pools approach. The following data were available for Inventory Pool No. 1 for the two years following the adoption of LIFO:

Ending Inventory
At Current Year Cost/At Base Year Cost/Cost Index
1/1/16/$100,000/$100,000/1.00
12/31/16/126,000/120,000/1.05
12/31/17/140,800/128,000/1.10
Under the dollar-value LIFO method the inventory at December 31, 2017, should be
a) $128,000
b) $129,800
c) $130,800
d) $140,800

Answer 1

Using the dollar-value LIFO method and adjusting the base year cost by the cost index, the correct ending inventory for Dalton Company on December 31, 2017, is $128,000, which is option (a).

Step-by-step explanation:

The question involves calculating the ending inventory using the dollar-value LIFO inventory method. To find the inventory at December 31, 2017, we must adjust the base year cost by the cost index for the corresponding year. The inventory at the base year cost on January 1, 2016, was $100,000, with a cost index of 1.00.

By December 31, 2017, the cost index had risen to 1.10. Therefore, we need to adjust the base year cost of the ending inventory using the cost index to reflect the increase in price levels.

To calculate the updated inventory cost at the base year prices, we take the ending inventory at current year cost for December 31, 2017, which is $140,800, and divide it by the cost index at that time, 1.10. This gives us:

$140,800 / 1.10 = $128,000

Therefore, the correct ending inventory value, adjusted for price level changes using the dollar-value LIFO method, is $128,000, which corresponds to option (a).