Question

Sullivan Produce Co. switched from FIFO to LIFO on January 1, 2015, for external reporting and income tax purposes, while retaining FIFO for internal reports. On that date, the FIFO inventory equaled $360,000. The ensuing three-year period resulted in the following:

Inventory: Cost:

Date: Year-End costs: Index:

December 31, 2015: $438,000: 1.05

December 31, 2016: 460,000: 1.15

December 31, 2017: 520,000: 1.25

Refer to exhibit 7-5. The ending inventory at December 31, 2017, using the dollar-value LIFO method would be:

Answer 1

Using the dollar-value LIFO method, the ending inventory at December 31, 2017, for Sullivan Produce Co. is $420,000. This was calculated by adjusting the FIFO inventory by the relevant cost indices for each year and adding the recognized LIFO increment.

Step-by-step explanation:

To calculate the ending inventory using the dollar-value LIFO method, we first need to adjust the cost of the base year inventory using the given cost indexes for each year to reflect the current cost level. We then compare this to the ending year cost to find the increment in the LIFO layers.

To begin with, the base year (2015) inventory under FIFO is $360,000. At the end of 2015, the cost index is 1.05. To adjust the base year cost to the current level, we multiply $360,000 by the cost index for 2015 (1.05):

$360,000 × 1.05 = $378,000

This gives us the adjusted cost of the beginning inventory at the end of 2015. We compare this to the ending inventory cost for 2015, which is $438,000. The difference represents the increment in the LIFO layer for the year 2015.

2015 LIFO Increment = Ending Inventory Cost - Adjusted Beginning Inventory
$438,000 - $378,000 = $60,000

For 2016, we adjust the beginning FIFO inventory plus the 2015 LIFO layer ($360,000 + $60,000) using the 2016 index:

$420,000 × 1.15 = $483,000 (adjusted cost)

Comparing this with the 2016 ending inventory cost of $460,000, there is no increment as the adjusted cost is higher than the ending inventory cost.

For 2017, we continue the same process using the inventory cost including the 2015 LIFO layer and the 2016 index:

$420,000 × 1.25 = $525,000 (adjusted cost)

Again, comparing this with the 2017 ending inventory cost of $520,000 there is no increment as the adjusted cost is higher than the ending inventory cost.

The dollar-value LIFO inventory at the end of 2017 is therefore:

$360,000 (FIFO base year inventory) + $60,000 (2015 LIFO increment) = $420,000