Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 8, Problem 6P

Retail Inventory Method Turner Corporation uses the retail inventory method. The following information relates to 2019:

Chapter 8, Problem 6P, Retail Inventory Method Turner Corporation uses the retail inventory method. The following

Required:

Compute the cost of the ending inventory under each of the following cost flow assumptions (round the cost-to-retail ratio to 3 decimal places):

  1. 1. FIFO
  2. 2. average cost
  3. 3. LIFO
  4. 4. lower of cost or market (based on average cost)

1.

Expert Solution
Check Mark
To determine

Calculate the cost of ending inventory by the retail method using FIFO cost flow.

Explanation of Solution

Retail inventory method: It takes into account all the retail amounts that is, the current selling prices. Under this method, the goods available for sale, at retail is deducted from the sales, at retail to determine the ending inventory, at retail.

Conventional Retail Method: Conventional retail method refers to the estimation of the lower of average cost or market by eliminating the markdowns from the calculation of the cost-to-retail percentage.

In this case, the cost-to-retail percentage will be determined by dividing the goods available for sale at cost by the goods available for at retail (excluding markdowns). Thus, the conventional retail method will always result in lower estimation of ending inventory when the markdowns exist.

FIFO: Under this inventory method, the units that are purchased first are sold first. Thus, it starts from the selling of the beginning inventory, followed by the units purchased in a chronological order of their purchases took place during a particular period.

Calculate the cost of ending inventory by the retail method using FIFO cost flow.

Ending Inventory - FIFO
DetailsCost ($)Retail ($)
Purchases140,000190,000
Less: Purchases discount taken(3,000)0
         Purchases returns(5,000)(8,000)
Freight -in20,0000
Net additional markups040,000
Net markdowns0(12,000)
Goods available for sale after markdowns152,000210,000
   
Add: Beginning inventory29,00045,000
Goods available for sale181,000255,000
Less: Net sales (190,000)
          Employee discounts (3,000)
Ending inventory at retail $62,000
Ending inventory at cost$44,888 

Table (1)

Working note 1:

Calculate the amount of net additional markups.

Net additional markups = (Additional markups at retailMarkup cancellations)=($50,000$10,000)=$40,000

Working note 2:

Calculate the amount of net additional markdowns.

Net additional markdowns = (Markdowns at retailMarkdown cancellations)=($15,000$3,000)=$12,000

Working note 3:

Calculate ending inventory at cost.

Step 1: Calculate cost-to-retail ratio.

Cost-to-retail ratio= (Goods available for sale at cost (After markdowns)Goods available for sale at retail (After markdowns))=($152,000$210,000)=.724

Step 2: Calculate ending inventory at cost.

Ending inventory at cost = (Ending inventory at retail×Cost-to-retail ratio)=($62,000×.724)=$44,888

Conclusion

Therefore, the cost of ending inventory by the retail method using FIFO cost flow is $44,888.

2.

Expert Solution
Check Mark
To determine

Calculate the cost of ending inventory by the retail method using average cost flow.

Explanation of Solution

Average cost method: Under this method, the cost of the goods available for sale is divided by the number of units available for sale during a particular period.

Calculate the cost of ending inventory by the retail method using average cost flow.

Ending Inventory - Average Cost
DetailsCost ($)Retail ($)
Beginning inventory29,00045,000
Purchases140,000190,000
Less: Purchases discount taken(3,000)0
         Purchases returns(5,000)(8,000)
Freight -in20,0000
Net additional markups040,000
Net markdowns0(12,000)
Goods available for sale after markdowns181,000255,000
Less: Net sales (190,000)
          Employee discounts (3,000)
Estimated ending inventory at retail $62,000
Estimated ending inventory at cost$44,020 

Table (2)

Working note 1:

Calculate ending inventory at cost.

Step 1: Calculate cost-to-retail ratio.

Cost-to-retail ratio= (Goods available for sale at cost (After markdowns)Goods available for sale at retail (After markdowns))=($181,000$255,000)=.710

Step 2: Calculate ending inventory at cost.

Ending inventory at cost = (Ending inventory at retail×Cost-to-retail ratio)=($62,000×.710)=$44,020

Conclusion

Therefore, the cost of ending inventory by the retail method using average cost flow is $44,020.

3.

Expert Solution
Check Mark
To determine

Calculate the cost of ending inventory by the retail method using LIFO cost flow.

Explanation of Solution

LIFO: Under this inventory method, the units that are purchased last are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.

Calculate the cost of ending inventory by the retail method using LIFO cost flow:

Ending Inventory - LIFO
DetailsCost ($)Retail ($)
Beginning inventory29,00045,000
 
Purchases140,000190,000
Less: Purchases discount taken(3,000)0
         Purchases returns(5,000)(8,000)
Freight -in20,0000
Net additional markups040,000
Net markdowns0(12,000)
Goods available for sale after markdowns152,000210,000
 
Goods available for sale181,000255,000
Less: Net sales (190,000)
          Employee discounts (3,000)
Estimated ending inventory at retail $62,000
Estimated ending inventory at LIFO cost:  
     Beginning layer29,000 
     New layer12,308 
Total cost$41,308 

Table (3)

Working note 1:

Calculate ending inventory at cost for beginning layer.

Step 1: Calculate cost-to-retail ratio (Beginning layer).

Cost-to-retail ratio= (Beginning inventory for costBeginning inventory for retail)=($29,000$45,000)=.644

Step 2: Calculate ending inventory at cost (Beginning layer).

Ending inventory at cost = (Beginning inventory at retail×Cost-to-retail ratio)=($45,000×.644)=$29,000(Rounded)

Working note 2:

Calculate ending inventory at cost for new layer.

Step 1: Calculate cost-to-retail ratio (new layer).

Cost-to-retail ratio= (Goods available for sale at cost (After markdowns)Goods available for sale at retail (After markdowns))=($152,000$210,000)=.724

Step 2: Calculate ending inventory at cost (new layer).

Ending inventory at cost = ($17,000($210,000$193,000)×Cost-to-retail ratio)=($17,000×.724)=$12,308

Conclusion

Therefore, the cost of ending inventory by the retail method using LIFO cost flow is $41,308.

4.

Expert Solution
Check Mark
To determine

Calculate the cost of ending inventory by the retail method using lower of cost or market rule.

Explanation of Solution

Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, either at current market value or at historical cost price of the inventory, whichever is less.

Calculate the cost of ending inventory by the retail method using lower of cost or market rule.

Ending Inventory - LCM
DetailsCost ($)Retail ($)
Beginning inventory29,00045,000
Purchases140,000190,000
Less: Purchases discount taken(3,000)0
         Purchases returns(5,000)(8,000)
Freight -in20,0000
Net additional markups040,000
Goods available for sale before markdowns181,000267,000
Less: Net markdowns (12,000)
          Net sales -190,000
          Employee discounts (3,000)
Estimated ending inventory at retail $62,000
Estimated ending inventory at cost (LCM)$42,036 

 Table (4)

Working note 1:

Calculate ending inventory at cost:

Step 1: Calculate cost-to-retail ratio.

Cost-to-retail ratio= (Goods available for sale at cost (before markdowns)Goods available for sale at retail (before markdowns))=($181,000$267,000)=.678

Step 2: Calculate ending inventory at cost.

Ending inventory at cost = (Ending inventory at retail×Cost-to-retail ratio)=($62,000×.678)=$42,036

Conclusion

Therefore, the cost of ending inventory by the retail method using LCM cost flow is $42,036.

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Chapter 8 Solutions

Intermediate Accounting: Reporting And Analysis

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