Question E9-21 - Intermediate Accounting (Kieso)

Question

Presented below is information related to Ricky Henderson Company. Cost Retail Beginning inventory \( 200,000 \) 280,000 Purchases 1,375,000 2,140,000 Markups 95,000 Markup cancellations 15,000 Markdowns 35,000 Markdown cancellations 5,000 Sales revenue 2,200,000 Instructions Compute the inventory by the conventional retail inventory method.

Step-by-Step Solution

Answer

The inventory by retail inventory method equals $170,100.

Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows:

	Cost		Retail
Beginning inventory	$200,000		$280,000
Purchases	1,375,000		2,140,000
Totals	1,575,000		2,420,000
Add: Net markups
Markups		95,000
Markup cancellations	________	15,000	80,000
Totals	1,575,000		2,500,000
Deduct: Net markdowns
Markdowns		35,000
Markdowns cancellations		5,000	30,000
Sales price of goods available			2,470,000
Deduct: Sales (net)			2,200,000
Ending inventory at retail			$270,000

Calculation of cost-to-retail ratio

Cost to retail ratio is calculated as follows: 

$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio}=\frac{\mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$1,575,000}{\$2,500,000} \\ =63\% \end{gathered}$$

 

Calculation of inventory value at cost

Inventory at cost is calculated as follows: 

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Cost}=\mathrm{Inventory} \mathrm{at} \mathrm{Retail}\times \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio} \\ =\$270,000\times 63\% \\ =\$170,100 \end{gathered}$$

 

Thus, ending inventory at cost is $170,100.