Q13P.
Question
GROUPWORK (Retail, LIFO Retail, and Inventory Shortage) Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year. Cost Retail Beginning inventory \( 68,000 \)100,000 Purchases 255,000 400,000 Net markups 50,000 Net markdowns 110,000 Sales revenue 320,000 According to the November 30, 2017, physical inventory, the actual inventory at retail is $115,000. Instructions (a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method. (b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations. Problems 487 488 Chapter 9 Inventories: Additional Valuation Issues (c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017. (d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.
Step-by-Step Solution
Verified- Circumstances and advantages are given in step 1.
- Ending inventory equals $83,000.
- The shortage amount equals $17,000.
- Handling of special items is mentioned in Step 4.
a. The circumstances in which retail inventory method are as follows:
- In order to compute the net income from the physical inventory.
- To measure the shortages of inventory
- Regulation of ending inventory quantities on hand
- Used for insurance purposes
The advantage of using the retail inventory method is that it has the average effect on the different rates of gross profits.
b. Ending inventory at retail is shown as follows:
| Cost | Retail |
Beginning inventory | $68,000 | $100,000 |
Net purchases | 255,000 | 400,000 |
Net markups |
| 50,000 |
Net markdowns |
| (110,000) |
Total excluding beginning inventory | 255,000 | 340,000 |
Total including beginning inventory | 323,000 | 440,000 |
Net sales during the period |
| (320,000) |
Ending inventory at retail |
| $120,000 |
Cost-to-retail ratio under the assumption of LIFO retail ($225,000/$340,000) |
| 75% |
Cost-to-retail ratio of beginning inventory ($68,000/$100,000) |
| 68% |
Ending Inventory at Retail | Layers at Retail Prices |
| Cost-to-Retail Percentage |
| Ending inventory at LIFO cost |
$120,000 | $100,000 | x | 68% | = | $68,000 |
| 20,000 | x | 75% | = | 15,000 |
| $120,000 |
|
|
| $83,000 |
c. The amount of shortage is calculated as follows:
- Freight costs are expenses incurred on the transportation when goods are purchased, and this expense is added tothe purchase cost.
- Purchase returns and allowances include the goods returned to suppliers and allowance and discount provided by suppliers. It is subtracted from both cost prices and retail prices of the inventory.
- Sales returns and allowances include the goods returned to business from the customers and allowance and discount provided to customers. It is subtracted from the sales to calculate net sales.
- Employee discounts refer to the reduction in the selling price provided to the business employees. It is subtracted from the sales.