Question

Trout Company uses the LIFO method for financial reporting purposes but FIFO for internal reporting purposes. At January 1, 2017, the LIFO reserve has a credit balance of $ 1,300,000. At December 31, 2017, Trout’s internal reports indicated that the FIFO inventory balance was $ 2,900,000 and for external reporting purposes the LIFO inventory balance was $ 1,500,000.

What is the amount of the LIFO reserve and the LIFO effect related to 2017?

Answer 1

The calculated LIFO reserve at the end of 2017 is $1,400,000. The LIFO effect related to 2017, which reflects the change in the LIFO reserve over the year, is $100,000. This amount represents the additional cost of goods sold recognized due to using the LIFO method.

Step-by-step explanation:

The question relates to the calculation of the LIFO reserve and the LIFO effect in accounting for Trout Company's inventory using two different inventory accounting methods: Last-In, First-Out (LIFO) and First-In, First-Out (FIFO). To find the LIFO reserve at the end of the year, we subtract the LIFO inventory balance from the FIFO inventory balance. The LIFO reserve at the beginning of 2017 was $1,300,000 (credit balance), and the FIFO inventory was $2,900,000 at the end of 2017. The LIFO inventory at the end of 2017 was $1,500,000. Therefore, the LIFO reserve is calculated as $2,900,000 (FIFO) - $1,500,000 (LIFO) = $1,400,000.

The LIFO effect related to 2017 is the change in the LIFO reserve from the beginning to the end of the year. This is calculated as $1,400,000 (end LIFO reserve) - $1,300,000 (beginning LIFO reserve) = $100,000. This $100,000 is the additional cost of goods sold expense recognized in 2017 because of using LIFO instead of FIFO.