Chapter 9, Problem 9.19E

Dollar-value LIFO retail

• LO9–5

On January 1, 2018, the Brunswick Hat Company adopted the dollar-value LIFO retail method. The following data are available for 2018:

	Cost	Retail
Beginning inventory	$ 71,280	$ 132,000
Net purchases	112,500	255,000
Net mark-ups		6,000
Net markdowns		11,000
Net sales		232,000
Retail price index, 12/31/2018		1.04

Required:

Calculate the estimated ending inventory and cost of goods sold for 2018.

To determine

Dollar-Value-LIFO: This method shows all the inventory figures at dollar price rather than units. Under this inventory method, the units that are purchased last, are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.

To Estimate: the ending inventory and cost of goods sold for 2018.

Explanation of Solution

Calculate the amount of estimated ending inventory and cost of goods sold for 2018.

Details	Cost ($)	Retail ($)
Beginning inventory	71,280	132,000
Add:  Net purchases	112,500	255,000
Net markups		6,000
Less:  Net markdowns		(11,000)
Goods available for sale – Excluding beginning inventory	112,500	250,000
Goods available for sale – Including beginning inventory	183,780	382,000
Less:  Net sales		(232,000)
Estimated ending inventory at current year retail prices		150,000
Estimated ending inventory at cost	(77,004)
Estimated cost of goods sold	106,776

Table (1)

Working notes:

Calculate base layer cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Base layer cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Beginning inventory at cost}}{\text{Beginning inventory at retail}}\times 100\right)\\ =\left(\frac{\$71,280}{\$132,000}\times 100\right)\\ =54\%\end{array}$ (1)

Calculate current year layer (2018) cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to }\\ \text{retail percentage (2018)}\end{array}\}\text{ =}\left\{\frac{\left[\begin{array}{l}\text{Goods available for sale at cost}\\ \text{ (Excluding beginning inventory)}\end{array}\right]}{\left[\begin{array}{l}\text{Goods available for sale at retail}\\ \text{(excluding beginning inventory)}\end{array}\right]}\times 100\right\}\\ =\left(\frac{\$112,500}{\$250,000}\times 100\right)\\ =45\%\end{array}$ (2)

Calculate the amount of estimated ending inventory at cost.

Ending inventory at dollar-value LIFO retail cost
	Step 1	Step 2	Step 3
Ending inventory at year-end retail prices ($)	Ending inventory at base year retail prices ($)	Inventory layers at base year retail prices ($)	Inventory layers converted to cost ($)
150,000 (refer Table 1)	144,231(3)	132,000 (Base) (4)	71,280 (6)
		12,231 (2018) (5)	5,724(7)
Total ending inventory at dollar-value LIFO retail cost			$77,004

Table (2)

Calculate the amount of ending inventory at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Ending inventory }\\ \text{at base year retail prices (2018) }\end{array}\}\text{= }\left(\frac{\text{Estimated ending inventory at retail}}{\text{Retail price index}}\right)\\ =\left(\frac{\$150,000}{1.04}\right)\\ =\$144,231\end{array}$ (3)

Calculate the amount of inventory layers at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ base year retail prices }\end{array}\}\text{= Beginning inventory at retail}\\ \text{=\$132,000 (Base)}\end{array}$ (4)

Calculate the amount of inventory layers at current year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ current year retail prices (2018) }\end{array}\}\text{= }\left(\begin{array}{l}\text{Ending inventory at base}\\ \text{ year retail prices (2018)}\\ -\text{Beginning inventory at retail (2018)}\end{array}\right)\\ =\$144,231-\$132,000\\ =\$12,231\end{array}$ (5)

Calculate the amount of inventory layers converted to cost (Base).

$\begin{array}{c}\text{Inventory layers converted to cost =}\left(\begin{array}{l}\text{Beginning inventory at retail (Base)}\times \\ \text{Base price index}\times \\ \text{Base layer cost-to retail percentage}\end{array}\right)\\ =\left(\$132,000\times 1.00\times 54\%\right)\\ =\$71,280\end{array}$ (6)

Calculate the amount of inventory layers converted to cost (2018).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers }\\ \text{converted to cost (2018) }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at current year retail}\\ \text{ prices (2018)}\times \\ \text{Retail price index (2018)}\times \\ \text{Current year cost-to retail percentage (2018)}\end{array}\right)\\ =\left(\$12,231\times 1.04\times 45\%\right)\\ =\$5,724\end{array}$ (7)

Conclusion

Therefore, the ending inventory and cost of goods sold for 2018 using dollar-value LIFO retail method are $77,004 and $106,776 respectively.