- 15 -
one-year index, referred to as the current years’ index.
Each year’s current-year index is multiplied (or
“linked”) to all preceding year’s [sic] current-year
indexes to arrive at a cumulative price index that
relates back to the taxpayer’s base year.
1 Schneider, Federal Taxation of Inventories, sec. 14.02[3][b], at
14-100.7 – 100.8 (2006) (fn. refs. omitted).9
The following example, Example (2), continues the facts of
Example (1). It is based on the assumption that, as of the
beginning of year 1, in addition to electing to compute its
inventory by use of the dollar-value LIFO method, T elected to use
the link-chain method to compute the base-year and current-year
cost of its inventory pools. Example (2) illustrates the
computation of T’s ending inventory for Pool No. 1 for year 2. An
increment in year 2 closing inventory is determined to exist at
base-year costs, and a LIFO value is assigned to that increment,
using yearly increments in cost, as shown.
Example (2): During year 2, T completely disposes of Item A
and purchases Item D, which is properly includible in Pool No. 1.
T constructs a prior year unit cost for Item D.
Dec. 31, yr. 2, Dec. 31, yr. 2,
inventory at inventory at
prior-year cost current-year cost
Items Quantity Unit Cost Amount Unit Cost Amount
B 2,000 $5.00 $10,000 $6.00 $12,000
C 500 2.50 1,250 3.00 1,500
D 2,500 6.00 15,000 8.00 20,000
Totals 26,250 33,500
9 The computational procedures for the link-chain method
are described by the Commissioner in Rev. Proc. 97-36, sec.
2.04(1)(c) and (d), 1997-2 C.B. 450, 451.
Page: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 NextLast modified: May 25, 2011