Question

On January 1, 2021, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this...

On January 1, 2021, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,700. The ending inventory, valued at year-end costs, and the relative cost index for each of the next three years is below:

Year-end Ending inventory at
year-end costs		 Cost Index
2021 $ 128,205 1.05
2022 146,080 1.10
2023 156,540 1.20


In determining the inventory balance for Badger to report in its 12/31/2022 balance sheet:

Multiple Choice

  • An additional layer of $11,770 is added to the 12/31/2021 balance.

    Correct

  • An additional layer of $23,770 is added to the 12/31/2021 balance.

  • An additional layer of $22,770 is added to the 12/31/2021 balance.

  • None of these answer choices are correct.

Explanation

$146,080 ÷ 1.10 = $132,800. This includes the previous two layers, the first at $100,700 and the second at $21,400, plus another at $10,700. The third layer is added to the 12/31/2021 inventory balance as $10,700 × 1.10 = $11,770.

Could someone please explain on this how 11,770 cam up step by step.

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Homework Answers

Answer #1

1. Convert inventory prices into base prices:

Ending Inventory 2021 = Inventory Value * 100 / Cost Index = $128205 * 100 / 105 = $122100

Ending Inventory 2022 = Inventory Value * 100 / Cost Index = $146080 * 100 / 110 = $132800

2. Computation of Layers formed in Year 2021 and 2022

Additional Layer formed in Year 2021 = (2021 Ending Inventory Base Price - Opening Inventory) * Cost Index 2021

Additional Layer formed in Year 2021 = (122100 - 100700) * 1.05 = $22470

Additional Layer formed in Year 2022 = (2022 Ending Inventory Base Price - 2021 ending inventory base price) * Cost Index 2022

Additional Layer formed in Year 2022 = (132800 - 122100) * 1.10 = $10700 * 1.1 = $11770

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