[zuizuizuilan]

Becker Question –

Athens Corporation adopted the dollar-value LIFO method of inventory valuation on December 31, Year 1. Its inventory at that date was $100,000 and the relevant price index was 100. Information regarding inventory for subsequent years is as follows:
Date:
December 31, Year 2
December 31, Year 3
December 31, Year 4
Inventory at Current Prices:
$128,400
145,000
169,000
Price Index:
107
125
130

What is the cost of the ending inventory at December 31, Year 3, under dollar-value LIFO?
a.$145,000 b.$116,000 c.$117,120 d.$117,400

The answer is C.
Can anyone help to understand the answer? Thanks a lot.

 

 

[Anonymous]

Bumping this instead of starting my own as I have a question about it as well.

The solution shows that they use the 1.07 price index to calculate the dollar-value LIFO layer for both Year 2 and Year 3 as shown below:

Year 1

$100,000

Year 2

$128,000/1.07 = $120,000

$120,000 – $100,000 = $20,000

$20,000 * 1.07 = $21,400

Ending Balance: $121,400

Year 3

$145,000/1.25 = $116,000

$116,000 – $100,000 = $16,000

$16,000 * 1.07 = $17,120

Ending Balance: $117,120

Can someone explain why they used the Year 2 price index for Year 3?

[MustPass1988]

I actually submitted this question to Becker because I was also confused by it. Here's the response I received:

Question: Question

“I'm having trouble understanding why the year 3 LIFO layer is added to the $100,000, rather than $121,400. Also, why is the index of 1.07 used to calculate the layer, instead of 1.25?”

Answer: Thanks for contacting us.

I wish I had a dollar for each time this question has come up. I would be rich. 

This particular question is very specific. There is a LIFO (layer) liquidation in this question. Because of the LIFO liquidation, there is no Year 3 layer to apply the Year 3 price index to. In fact, the Year 2 layer in Year 3 is smaller than it was previously. That is a liquidation.

If you have any additional questions, please do not hesitate to ask. That is what we are here for – to help you pass the exam.

Mike Meriwether MBA CPA MTax

Passed Levels I and II of the CFA Exam; Level III Candidate

Top 96 in US on May 1980 CPA Exam; 1st or 2nd in Texas for 1980

Becker Instructor Since 1980

Retired Senior Faculty Keller Graduate School (Accounting and Information Technology)

The Becker Academic Support Team

AUD: PASSED [81]; Expired, retaking August 23rd
BEC: PASSED [83]; Expired, retaking July 11th
REG: PASSED [83]
FAR: FAILED [64]; Retaking May 23rd

[Tywin]

I had the same confusion when I saw this problem. This question involves LIFO layer liquidation, a twist to the dollar-value LIFO problem calculations that is not in the book for some reason. It’s funny that the email response from Becker mentioned that they get this question a lot….maybe if they included an explanation about LIFO liquidation in the book, less people would ask about it. The problem answer only shows the calculations and does not explain anything. Not helpful.

Here’s a video that made it easy for me to understand: https://www.youtube.com/watch?v=jwJgo1fdfyY

Essentially, if a year-end base amount is less than the prior year-end base amount (yielding an apparent negative LIFO layer), that difference must be subtracted (LIFO liquidation) from the prior year’s LIFO layer, which requires a recalculation of some numbers. And in the year of the apparent “negative LIFO layer,” the layer is zero, and thus that year’s dollar-value LIFO amount is also zero.

Calculations:

12/31/Y1 base amount = 100,000 (given)

12/31/Y2 base amount = 128,400 / 1.07 = 120,000

So the year 2 layer is 120,000 – 100,000 = 20,000

And the year 2 dollar-value is initially 20,000 * 1.07 = 21,400

But after you calculate the 12/31/Y3 base amount, you get an apparent negative year 3 layer:

12/31/Y2 base amount = 120,000

12/31/Y3 base amount = 145,000 / 1.25 = 116,000

Year 3 layer appears to be negative: 116,000 – 120,000 = (4,000) !?! wtf?

When this happens, you have to subtract the 4,000 from the 20,000 year 2 layer to get an adjusted year 2 layer of 16,000 (it was originally 20,000)

Then you recalculate the year 2 dollar-value amount using the adjusted year 2 layer: 16,000 * 1.07 = 17,120 (it was originally 21,400)

This leads to the 12/31/Y2 total dollar-value amount of: 100,000 + 17,120 = 117,120

Because there is an apparent “negative layer” in year 3, the year 3 layer is just zero because it can't be negative, and the year 3 dollar-value amount is zero as well: 0 * 1.25 = 0

Therefore, the 12/31/Y3 total dollar-value LIFO ending inventory amount equals the 12/31/Y2 dollar-value amount plus the year 3 dollar-value amount: 117,120 + 0 = 117,120

I hope this helps! Hard to explain without a table or something. Definitely watch that video I linked above, the guy describes this well.

[D C]

@Tywin (lanister???)

thanks so much! I was going crazy trying to figure this one out…

and your right if they get so many Qs on it, either remove the question or explain it in the book!

DC

B - 80
A - 71, 67, 77
R - 71, 77
F - 72, 77
DONE!!
Becker Self-study all the way! Did use Ninja Notes & Audio for FAR.

[Anonymous]

so if you were to calculate the ending inventory at december 31, year 4, how would you do so?

[Author]

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