Question E9-25 - Intermediate Accounting (Kieso)

Question

Retail Inventory Method—Conventional and LIFO) Leonard Company began operations late in 2016 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2016 and no markdowns during 2016, the ending inventory for 2016 was \(14,000 under both the conventional retail method and the LIFO retail method. At the end of 2017, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2017. The following data are available for computations. Cost Retail Inventory, January 1, 2017 \)14,000 $20,000 Sales revenue 80,000 Net markups 9,000 Net markdowns 1,600 Purchases 58,800 81,000 Freight-in 7,500 Estimated theft 2,000 Instructions Compute 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 $19,272. 
2. Ending inventory is $18,800

Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows:

	Cost	Retail
Beginning inventory	$14,000	$20,000
Purchases (net)	58,800	81,000
Freight -in	7,500	______
Totals	80,300	101,000
Add: Net markups	_______	9,000
Totals	80,300	110,000
Deduct: Net markdowns		1,600
Sales price of goods available		108,400
Deduct: Sales (net)		80,000
Deduct: Estimated theft		2,000
Ending inventory at retail		$26,400

 

Calculation of the cost-to-retail ratio

The cost to retail ratio is calculated as follows: 

$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio}=\frac{\mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$80,300}{\$110,000} \\ =73\% \end{gathered}$$

 

Calculation of inventory value at cost by conventional retail method

Inventory at cost is calculated as follows: 

$$\begin{gathered} \mathrm{Ending}\hspace{0.17em}\mathrm{Inventory} \mathrm{at} \mathrm{Cost}=\mathrm{Inventory} \mathrm{at} \mathrm{Retail}\times \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio} \\ =\$26,400\times 73\% \\ =\$19,272 \end{gathered}$$

 

Calculation of ending inventory at retail for LIFO retail method

Ending inventory at retail is calculated as follows

	Cost	Retail
Beginning inventory	$14,000	$20,000
Purchases (net)	58,800	81,000
Freight-in	7,500
Net markups		9,000
Net markdowns	______	1,600
Totals (excluding beginning inventory)	66,300	88,400
Totals (including beginning inventory)	$80,300	108,400
Deduct: Sales (net)		80,000
Deduct: Estimated theft		2,000
Ending inventory at retail		$26,400

Calculation of the cost-to-retail ratio

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

$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio}=\frac{\mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$66,300}{\$88,400} \\ =75\% \end{gathered}$$

$$\begin{gathered} \mathrm{Cost} \mathrm{to} \mathrm{Retail} \mathrm{Ratio} \mathrm{for} \mathrm{Beginning} \mathrm{Inventory}=\frac{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{cost}}{\mathrm{Beginning} \mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$14,000}{\$20,000} \\ =70\% \end{gathered}$$

 

 

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
$26,400	$20,000	x	70%	$14,000
	6,400	x	75%	4,800
	$80,000			$18,800

 

Thus, ending inventory per conventional retail method is $19,272, and the LIFO retail method is $18,800.