Question
Quillfield Paper Co. keeps its internal inventory records on a FIFO basis but reports inventory under LIFO in its financial statements, as US GAAP permits. The difference is carried in a contra-inventory account, Allowance to Reduce Inventory to LIFO (the "LIFO reserve"), adjusted through Cost of Goods Sold at each year end.
On January 1, 2026 the allowance had a credit balance of $18,000.
| Year end | Inventory at FIFO | Inventory at LIFO |
|---|
| December 31, 2026 | $250,000 | $222,000 |
| December 31, 2027 | $240,000 | $226,000 |
Required: Prepare the year-end adjusting entry for the LIFO reserve at December 31, 2026 and at December 31, 2027.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 2 — Inventories
Cost includes purchase price, import duties, transport and handling, less trade discounts and rebates. The cost formula — FIFO or weighted average — is then applied consistently to inventories of a similar nature and use.
Common mistakes
- Recomputing the weighted average only at the period end when a moving average is required under a perpetual system.
- Including selling costs or storage of finished goods in inventory cost.
- Switching cost formula between periods without treating it as a change of accounting policy.
IFRS vs US GAAP: US GAAP permits LIFO; IAS 2 prohibits it.
Further readingIAS 2: costing methods and NRV