Problem 2 (35 points, expected time: 15-20 minutes)

Ruby's has the following information regarding inventory balances for 1997,1998 and 1999. Ruby is considering changing from a FIFO system to the Dollar Value LIFO system as of January 1, 1998.

Ending balance, at cost, from books Price Index

Balance, 12/31/97 beginning balance $9,000 1.00

Balance, 12/31/98 $10,000 1.10

Balance, 12/31/99 $13,500 1.12

Purchases: 1998 $ 20,000

Purchases: 1999 $ 21,000

Required:

(25 points) Calculate Ruby's Ending Inventory and Cost of Goods Sold for the 1998 and 1999 year end according to the Dollar Value LIFO method.

DV LIFO ending inventory DV LIFO Cost of Goods Sold

1998:

1999:

(5 points) What would the journal entry look like that Ruby's would use to adjust her records to the Dollar Value LIFO ending inventory and Cost of Goods Sold in 1998, in proper form ?

(5 points) Which method of inventory (FIFO or DV LIFO) would Ruby's managers prefer in 1999 if their bonuses were based on earnings per share? Explain very briefly.