Brock Co. adopted the dollar-value LIFO inventory method as of January 1, year 1. A single inventory pool and an internally computed price index are used to compute Brock's LIFO inventory layers. Information about Brock's dollar-value inventory follows:

 Brock Co. adopted the dollar-value LIFO inventory method as of January 1, year 1. A single inventory pool and an internally computed price index are used to compute Brock's LIFO inventory layers. Information about Brock's dollar-value inventory follows:

Inventory
Date    At base year cost    At current year cost    At dollar value LIFO
1/1/Y1    $40,000    $40,000    $40,000
Year 1 layer     5,000    14,000     6,000
12/31/Y1    45,000    54,000    46,000
Year 2 layer    15,000    26,000           ?
12/31/Y2    $60,000    $80,000           ?
What was Brock's dollar-value LIFO inventory at December 31, year 2? (Note: Round calculated values to nearest whole 1,000.)

$80,000
$74,000
$66,000
$60,000

Answer

$66,000

 
 You Answered Correctly!
When using dollar-value LIFO, the ending inventory at current year cost must first be converted to base year cost. The 12/31/Y2 inventory at base year cost is given as $60,000. Since the 12/31/Y1 inventory at base year cost was $45,000 ($40,000 base layer and $5,000 year 1 layer), a new layer of $15,000 was added in year 2 ($60,000 − $45,000). This layer must be restated using the year 2 price index. The year 2 price index is computed using the double-extension technique, as illustrated below.

EI at year-end prices    =    $80,000    =    1.33
EI at base year prices    $60,000
Therefore, the 12/31/Y2 inventory using dollar-value LIFO is $66,000 as computed below.

Base cost        DV LIFO
Base layer    $40,000        $40,000
Year 1 layer    5,000        6,000
Year 2 layer    15,000     × 1.33    20,000
$66,000