Q20E - Intermediate Accounting (Kieso)

Question

Presented below is information related to Bobby Engram Company. Cost Retail Beginning inventory \( 58,000 \)100,000 Purchases (net) 122,000 200,000 Net markups 10,345 Net markdowns 26,135 Sales revenue 186,000 Instructions (a) Compute the ending inventory at retail. (b) Compute a cost-to-retail percentage (round to two decimals) under the following conditions. (1) Excluding both markups and markdowns. (2) Excluding markups but including markdowns. (3) Excluding markdowns but including markups. (4) Including both markdowns and markups. (c) Which of the methods in (b) above (1, 2, 3, or 4) does the following? (1) Provides the most conservative estimate of ending inventory. (2) Provides an approximation of lower-of-cost-or-market. (3) Is used in the conventional retail method. (d) Compute ending inventory at lower-of-cost-or-market (round to nearest dollar). (e) Compute cost of goods sold based on (d). (f) Compute gross margin based on (d).

Step-by-Step Solution

Answer

All the requirements are mentioned in the below steps. 

Step-by-Step Solution Step 1: Calculation of ending inventory at retail

(a) Ending inventory at retail is calculated as follows:

	Cost	Retail
Beginning inventory	$58,000	$100,000
Purchases	122,000	200,000
Net markups		10,345
Totals		310,345
Net markdowns		26,135
Sales price of goods available		284,210
Less: Sales		186,000
Ending inventory at retail		$98,210

Step 2: Calculation of cost-to-retail percentage

(b) Cost to the retail percentage for each case is calculated as follows:

	Cost	Retail	Cost-to-Retail Ratio
Beginning inventory	$58,000.00	$100,000
Purchases	$122,000.00	200,000
Net markups		10,345
Net markdowns		26,135
(1) Excluding both markups and markdowns	180,000.00	300,000	60.00%
(2) Excluding markups and including markdowns	180,000.00	273,865	65.73%
(3) Excluding markdowns and including markups	180,000.00	310,345	58.00%
(4) Including both markdowns and markups	180,000.00	284,210	63.33%

Step 3: Analysis of methods

(c1) Method 3 is the most conservative estimate.

(c2) Method 3 provides an approximation of lower of cost or market.

(c3) Method 3 is used in the conventional retail method. 

Step 4: Calculation of ending inventory value

(d) Ending inventory at retail equals $98,210, and inventory at cost (market) equals $56,961.80, hence ending inventory equals $56,961.80 per lower-of-cost-or-market. 

Ending inventory is calculated as follows: 

$$\begin{gathered} \mathbf{Ending}\mathbf{ }\mathbf{Inventory}\mathbf{ }\mathbf{at}\mathbf{ }\mathbf{Cost}\mathbf{=}\mathbf{Ending}\mathbf{ }\mathbf{Inventory}\mathbf{ }\mathbf{at}\mathbf{ }\mathbf{Retail}\mathbf{\times }\mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Retail}\mathbf{ }\mathbf{Percentage} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{98}\mathbf{,}\mathbf{210}\mathbf{\times }\mathbf{58}\mathbf{\%} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{56}\mathbf{,}\mathbf{961}\mathbf{.}\mathbf{80} \end{gathered}$$

Step 5: Calculation of cost of goods sold

(e) Cost of goods sold is calculated as follows: 

$$\begin{gathered} \mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{Goods}\mathbf{ }\mathbf{Sold}\mathbf{=}\mathbf{Beginning}\mathbf{ }\mathbf{Inventory}\mathbf{+}\mathbf{Purchases}-\mathbf{Ending}\mathbf{ }\mathbf{Inventory} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{58}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{122}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{56}\mathbf{,}\mathbf{961}\mathbf{.}\mathbf{80} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{123}\mathbf{,}\mathbf{038}\mathbf{.}\mathbf{20} \end{gathered}$$

Step 6: Calculation of gross margin

(f) Gross margin is calculated as follows: 

$$\begin{gathered} \mathbf{Gross}\mathbf{ }\mathbf{Margin}\mathbf{=}\mathbf{Sales}\mathbf{ }\mathbf{Revenue}-\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{Goods}\mathbf{ }\mathbf{Sold} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{186}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{123}\mathbf{,}\mathbf{038}\mathbf{.}\mathbf{20} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{961}\mathbf{.}\mathbf{80} \end{gathered}$$

$$\begin{gathered} \mathbf{Gross}\mathbf{ }\mathbf{Margin}\mathbf{ }\mathbf{Percentage}\mathbf{=}\frac{\mathrm{Gross} \mathrm{Margin}}{\mathrm{Sales} \mathrm{Revenue}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{961}\mathbf{.}\mathbf{80}}{\$186,000} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{33}\mathbf{.}\mathbf{85}\mathbf{\%} \end{gathered}$$