Bonita Industries began using dollar-value LIFO for costing its inventory two years ago. The ending inventory for the past two years in end-of-year dollars was $286000 and $465000 and the year-end price indices were 1.0 and 1.2, respectively. Assuming the current inventory at end of year prices equals $650000 and the index for the current year is 1.25, what is the ending inventory using dollar-value LIFO

Bonita Industries

The ending inventory using the dollar-value LIFO is:

$520,000

Explanation:

a) Data and Calculations:

                                           Year 1          Year 2       Current Year

Ending inventory            $286,000    $465,000    $650,000

Year-end price indices        1.0               1.2               1.25

Ending inventory

using dollar-value LIFO $286,000   $387,500     $520,000

b) The ending inventory is usually indexed using the base year price index.  This gives an ending inventory value that is consistent with the base year.  For example, since the current year's inventory equals $650,000, with a current year index of 1.25, the ending inventory is evaluated based on year 1's price index of 1.0.  The computation divides the current inventory value by the current price index ($650,000/1.25), giving $520,000 as the current year's ending inventory value.

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