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Ely Company had January 1 inventory of $100,000 when it adopted dollar-value LIFO.During the year, purchases were $600,000 and sales were $1,000,000.December 31 inventory at year-end prices was $126,500, and the price index was 110.
-What is Ely Company's ending inventory?
A)$110,000.
B)$115,000.
C)$116,500.
D)$126,500.

Question

Use the following information for 
Ely Company had January 1 inventory of $100,000 when it adopted dollar-value LIFO.During the year, purchases were $600,000 and sales were $1,000,000.December 31 inventory at year-end prices was $126,500, and the price index was 110.
-What is Ely Company's ending inventory?
A)$110,000.
B)$115,000.
C)$116,500.
D)$126,500.

Quizplus · Accepted Answer

To calculate Ely Company's ending inventory using dollar-value LIFO, we need to convert all inventory amounts to end-of-year prices using the price index.

First, we need to calculate the total value of inventory at the end of the year using the base-year cost of $100,000 and the price index of 110:

$100,000 x (110/100) = $110,000

Next, we need to add the value of all purchases made during the year:

$600,000 x (110/100) = $660,000

Now we have a total inventory value of $770,000 (base-year cost plus purchases at end-of-year prices).

To determine the ending inventory, we need to match the cost of goods sold (COGS) to this total inventory value, using the LIFO method.

COGS = $1,000,000 x (110/100) = $1,100,000

Starting with the most recent purchases, we subtract their value from COGS until it matches the total inventory value:

(1) $660,000 - $126,500 = $533,500 
(2) $533,500 - $100,000 = $433,500

Therefore, Ely Company's ending inventory is $433,500 at end-of-year prices, or $116,500 at base-year cost (using the price index to convert back). The answer is C) $116,500.

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