When the double extension approach to the dollar-value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number. Which of the following correctly states how components are used in the calculation of this index number?

 When the double extension approach to the dollar-value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number. Which of the following correctly states how components are used in the calculation of this index number?
In the numerator, the average of the ending inventory at base year cost and at current year cost.
In the numerator, the ending inventory at current year cost, and, in the denominator, the ending inventory at base-year cost.
In the numerator, the ending inventory at base-year cost, and, in the denominator, the ending inventory at current year cost.
In the denominator, the average of the ending inventory at base-year cost and at current year cost.

Answer

In the numerator, the ending inventory at base-year cost, and, in the denominator, the ending inventory at current year cost.

 You Answered Correctly!
This answer is correct because the index number used to convert the current year’s inventory layer is calculated as follows:

 

Index      =        Ending inventory at current year cost   
Ending inventory at base-year cost
 

This index indicates the relationship between current and base year prices as a percentage.  When multiplied by a new layer (which is the increase in inventory in base-year dollars), the index will convert the layer to current year dollars.