Chapter 9, Problem 9.12BE

Dollar-value LIFO retail

• LO9–5

This exercise is a continuation of BE 9–11. During 2019, purchases at cost and retail were $168,000 and $301,000, respectively. Net markups, net markdowns, and net sales for the year were $3,000, $4,000, and $280,000, respectively. The retail price index at the end of 2019 was 1.06. Estimating ending inventory in 2019 using the dollar-value LIFO retail method.

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 in 2019 using dollar-value LIFO retail method.

Explanation of Solution

Calculate the amount of estimated ending inventory at retail.

Details	Cost ($)	Retail ($)
Beginning inventory	50,451	86,000
Add:  Net purchase	168,000	301,000
Net markups		3,000
Less:  Net markdowns		(4,000)
Goods available for sale – Excluding beginning inventory	168,000	300,000
Goods available for sale – Including beginning inventory	218,451	386,000
Less:  Net sales		(280,000)
Estimated ending inventory at current year retail prices		106,000
Estimated ending inventory at cost	(59,762)
Estimated cost of goods sold	158,689

Table (1)

Working notes:

Calculate base layer cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Base layer cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Beginning inventory at cost}}{\text{Beginning inventory at retail}}\times 100\right)\\ =\left(\frac{\$40,800}{\$68,000}\times 100\right)\\ =60\%\end{array}$ (1)

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

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to }\\ \text{retail percentage (2018)}\end{array}\}\text{ =}\left\{\frac{\left[\begin{array}{l}\text{Goods available for sale at cost}\\ \text{ (Excluding beginning inventory)}\end{array}\right]}{\left[\begin{array}{l}\text{Goods available for sale at retail}\\ \text{(Excluding beginning inventory)}\end{array}\right]}\times 100\right\}\\ =\left(\frac{\$155,440}{\$268,000}\times 100\right)\\ =58\%\end{array}$ (2)

Calculate current year layer (2019) cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to }\\ \text{retail percentage (2019)}\end{array}\}\text{ =}\left\{\frac{\left[\begin{array}{l}\text{Goods available for sale at cost}\\ \text{ (Excluding beginning inventory)}\end{array}\right]}{\left[\begin{array}{l}\text{Goods available for sale at retail}\\ \text{(Excluding beginning inventory)}\end{array}\right]}\times 100\right\}\\ =\left(\frac{\$168,000}{\$300,000}\times 100\right)\\ =56\%\end{array}$ (3)

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 ($)	Inventory layers converted to cost ($)
106,000 (refer Table 1)	100,000(4)	68,000 (Base) (5)	40,800 (8)
		16,314 (2016) (6)	9,651(9)
		15,686 (2017) (7)	9,311(10)
Total ending inventory at dollar-value LIFO retail cost			$59,762

Table (2)

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

$\begin{array}{c}\begin{array}{l}\text{Ending inventory }\\ \text{at base year retail prices (2019) }\end{array}\}\text{= }\left(\frac{\text{Estimated ending inventory at retail}}{\text{Retail price index}}\right)\\ =\left(\frac{\$106,000}{1.06}\right)\\ =\$100,000\end{array}$ (4)

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

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ base year retail prices }\end{array}\}\text{= Beginning inventory at retail}\\ \text{=\$68,000 (Base)}\end{array}$ (5)

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

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ current year retail prices (2018) }\end{array}\}\text{= }\left(\begin{array}{l}\text{Ending inventory at base}\\ \text{ year retail prices (2018)}\\ -\text{Beginning inventory at retail (2018)}\end{array}\right)\\ =\$84,314-\$68,000\\ =\$16,314\end{array}$ (6)

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

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ current year retail prices (2019) }\end{array}\}\text{= }\left(\begin{array}{l}\text{Ending inventory at base }\\ \text{year retail prices (2019)}-\\ -\text{Beginning inventory at retail (2018)}-\\ \text{Inventory layers at current year}\\ \text{ retail prices (2018)}\end{array}\right)\\ =\$100,000-\$68,000-\$16,314\\ =\$15,686\end{array}$ (7)

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

$\begin{array}{c}\text{Inventory layers converted to cost =}\left(\begin{array}{l}\text{Beginning inventory at retail (Base)}\times \\ \text{Base price index}\times \\ \text{Base layer cost-to retail percentage}\end{array}\right)\\ =\left(\$68,000\times 1.00\times 60\%\right)\\ =\$40,800\\ \end{array}$ (8)

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

$\begin{array}{c}\begin{array}{l}\text{Inventory layers }\\ \text{converted to cost (2018) }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at current year retail}\\ \text{ prices (2018)}\times \\ \text{Retail price index (2018)}\times \\ \text{Current year cost-to retail percentage (2018)}\end{array}\right)\\ =\left(\$16,314\times 1.02\times 58\%\right)\\ =\$9,651\end{array}$ (9)

Calculate the amount of inventory layers converted to cost (2019).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers }\\ \text{converted to cost (2019)}\end{array}\}\text{ =}\left(\begin{array}{l}\left(\begin{array}{l}\text{Inventory layers at current }\\ \text{year retail prices }\left(\text{2019}\right)\end{array}\right)\times \\ \text{Retail price index (2019)}\times \\ \text{Current year cost-to retail percentage (2019)}\end{array}\right)\\ =\left(\$15,686\times 1.06\times 56\%\right)\\ =\$9,311\end{array}$ (10)

Conclusion

Therefore, the ending inventory in 2019 using dollar-value LIFO retail method is $59,762.