Q12P. - Intermediate Accounting (Kieso)

Question

As of January 1, 2017, Aristotle Inc. adopted the retail method of accounting for its merchandise inventory. To prepare the store’s financial statements at June 30, 2017, you obtain the following data. Cost Selling Price Inventory, January 1 \( 30,000 \) 43,000 Markdowns 10,500 Markups 9,200 Markdown cancellations 6,500 Markup cancellations 3,200 Purchases 104,800 155,000 Sales revenue 154,000 Purchase returns 2,800 4,000 Sales returns and allowances 8,000 Instructions (a) Prepare a schedule to compute Aristotle’s June 30, 2017, inventory under the conventional retail method of accounting for inventories. (b) Without prejudice to your solution to part (a), assume that you computed the June 30, 2017, inventory to be $59,400 at retail and the ratio of cost to retail to be 70%. The general price level has increased from 100 at January 1, 2017, to 108 at June 30, 2017. Prepare a schedule to compute the June 30, 2017, inventory at the June 30 price level under the dollarvalue LIFO retail method. (AICPA adapted)

Step-by-Step Solution

Answer

1. Ending inventory equals $33,000. 
2. Ending inventory equals $39,072.

Step1: Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows: 

	Cost		Retail
Beginning inventory	$30,000		$43,000
Purchases	104,800		155,000
Purchase returns	(2,800)		(4,000)
Purchase discounts	(18,000)
Total	132,000		194,000
Add: Net markups
Markups		9,200
Markup cancellations		3,200	6,000
Totals	132,000		200,000
Deduct: Net Markdowns
Markdowns		10,500
Markdown cancellations		6,500	4,000
Sales price of goods available			196,000
Deduct: Sales (net) ($154,000-$8,000)			146,000
Ending inventory at retail			$50,000
Ending inventory at cost ($50,000 x 66%)			$33,000
Ending inventory at lower-of-cost-or-market			$33,000

Step2: Calculation of the cost-to-retail ratio

The cost-to-retail ratio is calculated as follows: 

 

$$\begin{gathered} \mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{RetailRatio}\mathbf{=}\frac{\mathbf{InventoryatCost}}{\mathbf{InventoryatRetail}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{132}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{200}\mathbf{,}\mathbf{000}} \\ \mathbf{=}\mathbf{66}\mathbf{\%} \end{gathered}$$

Step 3: Calculation of ending inventory under the dollar-value LIFO retail method

The ending inventory is calculated as follows:

Ending inventory at retail (deflated) ($59,400 / 1.08)	$55,000
Beginning inventory at retail	43,000
Real increase in inventory in retail	$12,000
Ending inventory at retail on a LIFO basis
First layer	$30,000
Second layer ($12,000 x 1.08 x 70%)	9,072	$39,072

 

Thus ending inventory in (a) equals $33,000, and in (b) equals $39,072.