Q8P. - Intermediate Accounting (Kieso)

Question

The records for the Clothing Department of Sharapova’s Discount Store are summarized below for the month of January. Inventory, January 1: at retail \(25,000; at cost \)17,000 Purchases in January: at retail \(137,000; at cost \)82,500 Freight-in: \(7,000 Purchase returns: at retail \)3,000; at cost \(2,300 Transfers in from suburban branch: at retail \)13,000; at cost \(9,200 Net markups: \)8,000 Net markdowns: \(4,000 Inventory losses due to normal breakage, etc.: at retail \)400 Sales revenue at retail: \(95,000 Sales returns: \)2,400 Instructions (a) Compute the inventory for this department as of January 31, at retail prices. (b) Compute the ending inventory using lower-of-average-cost-or-market

Step-by-Step Solution

Answer

(a) The inventory at retail prices equals $83,000.

(b) The inventory using lower-of-average-cost-or-market equals $52,290.

Calculation of inventory at retail prices

Inventory at retail prices is calculated as follows: 

	Cost		Retail
Beginning inventory	$17,000		$25,000
Purchases	82,500		137,000
Freight-in	7,000
Purchase returns	(2,300)		(3,000)
Transfer in inventory	9,200		13,000
Totals	$113,400		172,000
Net markups	______		8,000
	$113,400		180,000
Net markdowns			(4,000)
Sales		$95,000
Sales returns		2,400	(92,600)
Inventory loss due to breakage			(400)
Ending inventory at retail			$83,000

Calculation of the cost-to-retail ratio

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

$$\begin{gathered} \mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{RetailRatio}\mathbf{=}\frac{\mathbf{InventoryatCost}}{\mathbf{InventoryatRetail}}\mathbf{\times }\mathbf{100} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{113}\mathbf{,}\mathbf{400}}{\mathbf{\$}\mathbf{180}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{100} \\ \mathbf{=}\mathbf{63}\mathbf{\%} \end{gathered}$$

Calculation of inventory at cost

Inventory at cost is calculated as follows: 

$$\begin{gathered} \mathbf{InventoryatCost}\mathbf{=}\mathbf{InventoryatRetail}\mathbf{\times }\mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{RetailRatio} \\ \mathbf{=}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{63}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{52}\mathbf{,}\mathbf{290} \end{gathered}$$

Inventory at retail value (market) is $83,000, and at cost equals $52,290. Hence, the lower-of-average-cost-or-market is $52,290, the lowest between the two.