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Ratio(as a
percentage)
Dec. 31, yr. 1 of total
inventory at current-year Dec. 31, yr. 1,
Jan. 1, yr. 1, cost to total inventory at
base-year cost base-year cost LIFO value
Jan. 1, yr. 1,
base cost $14,000 100.00% $14,000
Dec. 31, yr. 1,
increment 6,000 121.25% 7,275
Totals 20,000 21,275
The LIFO reserve for Pool No. 1 as of December 31, yr. 1, is
$2,975, computed as follows:
Dec. 31, yr. 1, inventory at current-year cost $24,250
Less: LIFO value of ending inventory 21,275
Equals: LIFO reserve 2,975
–- Link-Chain Method
Where use of either an index or double-extension method is
impractical or unsuitable due to the nature of the inventory in a
dollar-value pool, a taxpayer may use a link-chain method of
computing the LIFO value of the pool. Sec. 1.472-8(e)(1), Income
Tax Regs. The regulations do not contain any examples that
illustrate the computational procedures employed in using a link-
chain method. Leslie J. Schneider, in his treatise, Federal
Income Taxation of Inventories (2006), explains the link-chain
method as follows:
[T]he link-chain method is comparable to the double-
extension method, except that the base year is rolled
forward each year. Thus, instead of comparing the
current-year cost and the base-year cost of each item in
the ending inventory, under the link-chain method, the
current-year cost and the preceding year’s cost
(referred to as the item’s “prior-year cost”) of each
item are compared. This comparison is used to compute a
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