Question E9-24 - Intermediate Accounting (Kieso)

Question

Keller Company began operations on January 1, 2016, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2016 and, because there was no beginning inventory, its ending inventory for 2016 of \(38,100 would have been the same under either the conventional retail system or the LIFO retail system. On December 31, 2017, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2017, inventory would appear under both systems. All pertinent data regarding purchases, sales, markups, and markdowns are shown below. There has been no change in the price level. Cost Retail Inventory, Jan. 1, 2017 \) 38,100 $ 60,000 Markdowns (net) 13,000 Markups (net) 22,000 Purchases (net) 130,900 178,000 Sales (net) 167,000 Instructions Determine the cost of the 2017 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method

Step-by-Step Solution

Answer

1. Ending inventory is $52,000
2. Ending inventory is $52,100

Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows

	Cost	Retail
Beginning inventory	$38,100	$60,000
Purchases (net)	130,900	178,000
Totals	169,000	238,000
Add: Net markups	_______	22,000
Totals	169,000	260,000
Deduct: Net markdowns		13,000
Sales price of goods available		247,000
Deduct: Sales (net)		167,000
Ending inventory at retail		$80,000

Calculation of the cost-to-retail ratio

The cost to retail ratio is calculated as follows: 

$$\begin{gathered} \mathrm{Cost} \mathrm{to} \mathrm{Retail} \mathrm{Ratio}=\frac{\mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$169,000}{\$260,000} \\ =65\% \end{gathered}$$

 

Calculation of inventory value at cost by conventional retail method

Inventory at cost is calculated as follows: 

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Cost}=\mathrm{Inventory} \mathrm{at} \mathrm{Retail}\times \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio} \\ =\$80,000\times 65\% \\ =\$52,000 \end{gathered}$$

 

Calculation of ending inventory at retail for LIFO retail method

Ending inventory at retail is calculated as follows

	Cost	Retail
Beginning inventory	$38,100	$60,000
Purchases (net)	130,900	178,000
Net markups		22,000
Net markdowns	______	13,000
Totals (excluding beginning inventory)	130,900	187,000
Totals (including beginning inventory)	169,000	247,000
Sales (net)		167,000
Ending inventory at retail		$80,000

 

Calculation of cost-to-retail ratio

The cost-to-retail ratio for the LIFO method is calculated as follows: 

$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio}=\frac{\mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$130,900}{\$187,000} \\ =70\% \end{gathered}$$

$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio} \mathrm{for} \mathrm{Beginning} \mathrm{Inventory}=\frac{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$38,100}{\$60,000} \\ =63·50\% \end{gathered}$$

 

 

Calculation of ending inventory at LIFO cost

Ending inventory at LIFO cost is calculated as follows: 

Ending Inventory at Retail prices	Layer at Retail Prices		Cost-to-Retail Percentage	Ending Inventory at LIFO cost
$80,000	$60,000	x	63.50%	$38,100
	20,000	x	70%	14,000
	$80,000			$52,100

 

Thus, ending inventory per conventional retail method is $52,000, and per LIFO retail method is $52,100.