Q14P - Intermediate Accounting (Kieso)

Question

(Change to LIFO Retail) Diderot Stores Inc., which uses the conventional retail inventory method, wishes to change to the LIFO retail method beginning with the accounting year ending December 31, 2017.

Amounts as shown below appear on the store’s books before adjustment.

	Cost	Retail
Inventory 1 January 2017	\(15,800	\)24,000
Purchase in 2017	116,200	184,000
Markup in 2017		12,000
Markdowns in 2017		5,500
Sales revenue in 2017		175,000

 

You are to assume that all markups and markdowns apply to 2017 purchases, and that it is appropriate to treat the entire inventory as a single department.

Instructions 

Compute the inventory at December 31, 2017, under the following methods. 

(a) The conventional retail method. 

(b) The last-in, first-out retail method, effecting the change in method as of January 1, 2017. Assume that the cost-to-retail percentage for 2016 was recomputed correctly in accordance with procedures necessary to change to LIFO. This ratio was 59%.

Step-by-Step Solution

Answer

1. Ending inventory at cost is $23,700.
2. Ending inventory at LIFO cost is $25,255.

Step 1: Definition of Ending Method

Ending inventory can be defined as the value of the finished goods that are held by the business entity at the end of the financial period. This inventory is considered as current asset of the business. 

Step 2: 31 December 2017, under the conventional retail method

Particular	Cost	Retail
Inventory (beginning)	$15,800	$24,000
Purchase	116,200	184,000
Markups		12,000
Totals	$132,000	$220,000
Markdowns		(5,500)
Sales		(175,000)
Ending inventory at retail		$39,500

 

Ending inventory at a cost:

 $\begin{array}{rcl}Endinginventoryatcost& =& Endinginventoryatretail\times Cost-to-retailratio\\ & =& \$39,500\times 60\%\\ & =& \$23,700\\ & & \end{array}$

Working note:

Calculation of the cost-to-retail ratio

 $\begin{array}{rcl}Cost-to-retailratio& =& \frac{Cost}{Retail}\times 100\\ & =& \frac{\$132,000}{\$220,000}\times 100\\ & =& 60\%\\ & & \end{array}$

Step 3: 31 December 2017, under the LIFO method

Cost to retail ratio for 2017 is:

 $\begin{array}{rcl}Cost-to-retailratio& =& \frac{Netpurchasesatcost}{Netpurchases+Markups-Markdowns}\times 100\\ & =& \frac{\$116,200}{\$184,000+\$12,000-\$5,500}\times 100\\ & =& 61\%\end{array}$

Calculation of ending inventory at LIFO

	Retail	Cost-to-retail ratio	LIFO cost
Beginning inventory	$24,000		$15,800
Increment in 2017	15,500	61%	9,455
Ending inventory	$39,500		$25,255