Accounting Study Guide by AccountingInfo.com

Dollar Value LIFO

Steps of Dollar Value LIFO

   Determine the value of ending inventory at current cost.

   Inventory at current cost --> Inventory at base year cost

   Apply LIFO on the layers of inventory at base year cost.

   LIFO Inventory at base year cost --> Inventory at added year cost

Example 1 (Company A)

Company A adopted Dollar Value LIFO on January 1, 2006.

Date	Inventory at current year cost	Cost index
1/1/2006	$800,000	1.00
12/31/2006	$860,000	1.06
12/31/2007	$950,000	1.14
12/31/2008	$980,000	1.21
12/31/2009	$1,050,000	1.27

Example 1 (Solutions, Dollar Value LIFO)

Application of Dollar Value LIFO

Date	Inventory at base year cost	Inventory layers	Year of layer	Inventory at added year cost	Inventory (Dollar Value LIFO)
12/31/2006	$811,321 *(1)**	$800,000	Base layer	$800,000
		$11,321	2006	$12,000 *(2)**	$812,000

12/31/2007	$833,333 *(3)**	$800,000	Base layer	$800,000
		$11,321	2006	$12,000 *(2)**
		$22,013 *(4)**	2007	$25,094 *(5)**	$837,094

12/31/2008	$809,917 *(6)**	$800,000	Base layer	$800,000
		$9,917 *(7)**	2006	$10,512 *(8)**	$810,512

12/31/2009	$826,772 *(9)**	$800,000	Base layer	$800,000
		$9,917	2006	$10,512 *(8)**
		$16,854 *(10)**	2009	$21,405 *(11)**	$831,937

Notes:

      (*1) $860,000 x (1.00/1.06) = $811,321
      (*2) $11,321 X 1.06 = $12,000
      (*3) $950,000 x (1.00/1.14) = $833,333
      (*4) $833,333 - $800,000 - $11,321 = $22,013
      (*5) $22,013 X 1.14 = $25,094
      (*6) $980,000 x (1.00/1.21) = $809,917

      (*7) 12/31/2008 inventory decreased from 12/31/2007 by $23,416 at base year cost ($809,917 - $833,333 = -$23,416).
                By applying LIFO, $23,416 decrease is applied to recently added layers first.
                      --> $22,013 layer added in 2007 is reduced first.
                Additional $1,403 (= $23,416 - $22,013) is subtracted from the $11,321 layer added in 2006.
                     --> Layer added in 2006 is reduced to $9,917 (= $11,321 - $1,403).

      (*8) $9,917 X 1.06 = $10,512
               --> Cost index 1.06 is used because $9,917 layer was added in 2006.
      (*9) $1,050,000 x (1.00/1.27) = $826,772
      (*10) $826,772 - $800,000 - $9,917 = $16,854
      (*11) $16,854 X 1.27 = $21,405

Click here for pdf version of solutions to Example 1 (Company A).

Example 2 (Company B)

Company B adopted Dollar Value LIFO on January 1, 2006.

Date	Inventory at current year cost	Cost index
1/1/2006	$650,000	1.00
12/31/2006	$760,000	1.04
12/31/2007	$810,000	1.08
12/31/2008	$830,000	1.16
12/31/2009	$960,000	1.22

Example 2 (Solutions, Dollar Value LIFO)

Application of Dollar Value LIFO

Date	Inventory at base year cost	Inventory layers	Year of layer	Inventory at added year cost	Inventory (Dollar Value LIFO)
12/31/2006	$730,769 *(1)**	$650,000	Base layer	$650,000
		$80,769	2006	$84,000 *(2)**	$734,000

12/31/2007	$750,000 *(3)**	$650,000	Base layer	$650,000
		$80,769	2006	$84,000 *(2)**
		$19,231 *(4)**	2007	$20,769 *(5)**	$754,769

12/31/2008	$715,517 *(6)**	$650,000	Base layer	$650,000
		$65,517 *(7)**	2006	$68,138 *(8)**	$718,138

12/31/2009	$786,885 *(9)**	$650,000	Base layer	$800,000
		$65,517	2006	$68,138 *(8)**
		$71,368 *(10)**	2009	$87,069 *(11)**	$831,937

Notes:

      (*1) $760,000 x (1.00/1.04) = $730,769
      (*2) $80,769 X 1.04 = $84,000
      (*3) $810,000 x (1.00/1.08) = $750,000
      (*4) $750,000 - $650,000 - $80,769 = $19,231
      (*5) $19,231 X 1.08 = $20,769
      (*6) $830,000 x (1.00/1.16) = $715,517

      (*7) 12/31/2008 inventory decreased from 12/31/2007 by $34,483 at base year cost ($715,517 - $750,000 = -$34,483).
                By applying LIFO, $34,483 decrease is applied to recently added layers first.
                      --> $19,231 layer added in 2007 is reduced first.
                Additional $15,252 (= $34,483 - $19,231) is subtracted from the $80,769 layer added in 2006.
                     --> Layer added in 2006 is reduced to $65,517 (= $80,769 - $15,252).

      (*8) $65,517 X 1.04 = $68,138
               --> Cost index 1.04 is used because $65,517 layer was added in 2006.
      (*9) $960,000 x (1.00/1.22) = $786,885
      (*10) $786,885 - $650,000 - $65,517 = $71,368
      (*11) $71,368 X 1.22 = $87,069

Click here for pdf version of solutions to Example 2 (Company B).

Example 3 (Company C)

Company C adopted Dollar Value LIFO on January 1, 2006.

Date	Inventory at current year cost	Cost index
1/1/2006	$300,000	1.00
12/31/2006	$430,000	1.10
12/31/2007	$480,000	1.20
12/31/2008	$485,000	1.26
12/31/2009	$550,000	1.35

Solutions to Example 3:

Date	Inventory (Dollar Value LIFO)
1/1/2006	$300,000
12/31/2006	$400,000
12/31/2007	$410,909
12/31/2008	$393,413
12/31/2009	$423,770

Click here for pdf version of solutions to Example 3 (Company C).

Overview of Inventories

Dollar Value LIFO Example 1 in pdf file
Dollar Value LIFO Example 2 in pdf file
Dollar Value LIFO Example 3 in pdf file