ExpertHard1 markMultiple Choice
CPA · Question 18 · Area II: Balance Sheet Accounts
On January 1, Year 1, Retailer Co. adopted the Dollar-Value LIFO method. The inventory on that date was $200,000 (Base Year Cost). <br/><br/>At December 31, Year 1, the inventory at current year cost was $231,000. The price index for Year 1 is 1.05.<br/><br/>What is the Dollar-Value LIFO inventory balance at December 31, Year 1?
On January 1, Year 1, Retailer Co. adopted the Dollar-Value LIFO method. The inventory on that date was $200,000 (Base Year Cost). <br/><br/>At December 31, Year 1, the inventory at current year cost was $231,000. The price index for Year 1 is 1.05.<br/><br/>What is the Dollar-Value LIFO inventory balance at December 31, Year 1?
Answer options:
A.
$231,000
B.
$221,000
C.
$220,000
D.
$210,000
How to approach this question
1. Deflate ending inventory to Base Year Cost (Current Cost / Index). 2. Compare to Beginning Base Year Cost to find the new layer. 3. Inflate the new layer by the current index. 4. Add inflated layer to beginning LIFO balance.
Full Answer
B.$221,000✓ Correct
B
1. **Deflate Ending Inventory:** $231,000 / 1.05 = $220,000 (Base Year Cost).<br/>2. **Identify Layers:**<br/> Base Layer: $200,000<br/> New Year 1 Layer: $220,000 - $200,000 = $20,000 (at Base Cost).<br/>3. **Re-inflate Layers:**<br/> Base: $200,000 * 1.00 = $200,000.<br/> Year 1 Layer: $20,000 * 1.05 = $21,000.<br/>4. **Total DV LIFO:** $200,000 + $21,000 = $221,000.
Common mistakes
Forgetting to re-inflate the new layer; applying the index to the total base cost instead of just the layer.
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