Q9P. - Intermediate Accounting (Kieso)

Question

Presented below is information related to Waveland Inc. Cost Retail Inventory, 12/31/17 \(250,000 \) 390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 — Gross sales revenue (after employee discounts) — 1,410,000 Sales returns — 97,500 Markups — 120,000 Markup cancellations — 40,000 Markdowns — 45,000 Markdown cancellations — 20,000 Freight-in 42,000 — Employee discounts granted — 8,000 Loss from breakage (normal) — 4,500 486 Chapter 9 Inventories: Additional Valuation Issues Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2018.

Step-by-Step Solution

Answer

Ending inventory at cost equals $305,000.

Step1: Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows: 

	Cost		Retail
Beginning inventory	$250,000		$390,000
Purchases	914,500		1,460,000
Purchase returns	(60,000)		(80,000)
Purchase discounts	(18,000)
Freight in	42,000
Total	1,128,500		1,770,000
Add: Net markups
Markups		120,000
Markup cancellations		40,000	80,000
Totals	1,128,500		1,850,000
Deduct: Net Markdowns
Markdowns		45,000
Markdown cancellations		20,000	25,000
Sales price of goods available			1,825,000
Deduct: Sales (net) ($1,410,000-$97,500)			1,312,500
Deduct: Inventor loss due to breakage			4,500
Deduct: Employee discounts			8,000
Ending inventory at retail			$500,000

Step2: Calculation of the cost-to-retail ratio

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

 

$$\begin{gathered} \mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{RetailRatio}\mathbf{=}\frac{\mathbf{InventoryatCost}}{\mathbf{InventoryatRetail}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{128}\mathbf{,}\mathbf{500}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{850}\mathbf{,}\mathbf{000}} \\ \mathbf{=}\mathbf{61}\mathbf{\%} \end{gathered}$$

Step 3: Calculation of ending inventory at cost

Ending inventory at cost is calculated as follows: 

$$\begin{gathered} \mathbf{Ending}\mathbf{ }\mathbf{Inventory}\mathbf{ }\mathbf{at}\mathbf{ }\mathbf{Cost}\mathbf{=}\mathbf{Ending}\mathbf{ }\mathbf{Inventory}\mathbf{ }\mathbf{at}\mathbf{ }\mathbf{Retail}\mathbf{\times }\mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Retail}\mathbf{ }\mathbf{Ratio} \\ \mathbf{=}\mathbf{\$}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{61}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{305}\mathbf{,}\mathbf{000} \end{gathered}$$

 

Thus, ending inventory at cost equals $305,000.