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Example (3):
Dec. 31, yr. 3, Dec. 31, yr. 3,
inventory at inventory at
prior-year cost current-year cost
Items Quantity Unit Cost Amount Unit Cost Amount
B 1,500 $6.00 $9,000 $6.00 $9,000
C 600 3.00 1,800 4.00 2,400
D 2,500 8.00 20,000 7.00 17,500
Totals 30,800 28,900
(28,900/30,800 = 93.83%)
Cumulative index:
Base-year cost of Dec. 31, yr. 3, inventory:
1st year percentage link 121.25%
2nd year percentage link 127.62%
3rd year percentage link 93.83%
Product: Chain percentage, Dec. 31, yr. 3,
relative to Jan. 1, yr. 1, base date
(121.25% x 127.62% x 93.83%) 145.19%
Base-year cost ($28,900/145.19%) $19,905
The LIFO value of the inventory in Pool No. 1 at December 31,
year 3, is $21,161, computed as follows:
Ratio of
Dec. 31, yr. 3, current-year Dec. 31, yr. 3,
inventory at cost to 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 5,905 121.25% 7,160
Totals 19,905 21,160
The LIFO reserve for Pool No. 1 as of December 31, yr. 3, is
$9,739, computed as follows:
Dec. 31, yr. 3, inventory at current-year cost $28,900
Less: LIFO value of ending inventory 21,161
Equals: LIFO reserve 7,740
–- Preconditions to Use of LIFO Method
Use of the LIFO method for income tax purposes is dependent on
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