Question

Grimstad Company uses FIFO for internal reporting purposes and LIFO for financial reporting and income tax purposes. At the end of 2016, the following information was obtained from the inventory records: 2015 2016 Ending inventory, FIFO 100,000 140,000 Ending inventory, LIFO 80,000 115,000 Required: 1. Prepare the necessary adjusting journal entry assuming that Grimstad converts the accounts to LIFO at the end of 2016. 2. Indicate how Grimstad would disclose the inventory value in its notes to the financial statements prepared at the end of 2016. 3. Next Level By how much would Grimstad’s cost of goods sold differ in 2016 if it used FIFO for external reporting?

Answer 1

Particulars	2015	2016
Ending inventory FIFO	100000	140000
Ending inventory LIFO	80000	115000
LIFO Reserve	20000	25000

LIFO Reserve = FIFO Inventory-LIFO Inventory

LIFO effect = 25000-20000= 5000

Journal Entries

particulars	Debit	credit
Cost of goods sold	5000
allowance to reduce inventory to LIFO		5000

2) grimstad company needs to disclose either the LIFO reserve or the cost of replacing the inventory in footnote

Both the LIFO reserve should be mentioned in footnotes

3) FIFO cost of goods sold= LIFO cost of goods sold-change in LIFO Reserve

Difference will be equal to $5000