Chapter 9, Problem 9.13P

Retail inventory method; various applications

• LO9–3 through LO9–5

On January 1, 2018, Pet Friendly Stores adopted the retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2018 and 2019 are as follows:

Required:

1. 1. Estimate the 2018 and 2019 ending inventory and cost of goods sold using the dollar-value LIFO retail method.
2. 2. Estimate the 2018 ending inventory and cost of goods sold using the average cost retail method.
3. 3. Estimate the 2018 ending inventory and cost of goods sold using the conventional retail method.

To determine

Dollar-Value-LIFO

This method shows all the inventory figures at dollar price rather than units. Under this inventory method, the units that are purchased last, are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.

To Estimate: the ending inventory and cost of goods sold in 2018 using dollar-value LIFO retail method.

Explanation of Solution

Calculate the amount of estimated ending inventory and cost of goods sold at retail.

Details	Cost ($)	Retail ($)
Beginning inventory	90,000	150,000
Add: Net purchase	478,000	730,000
Freight-in	6,960
Net markups		8,500
Less: Net markdowns		(4,000)
Purchase returns	(2,500)	(3,500)
Goods available for sale – Excluding beginning inventory	482,460	731,000
Goods available for sale – Including beginning inventory	572,460	881,000
Less: Normal spoilage	0	(5,000)
Net sales		(664,000)
Employees discounts		(6,000)
Estimated ending inventory at current year retail prices		206,000
Estimated ending inventory at cost (Refer Table 2)	(123,990)
Estimated Cost of Goods Sold	448,470

Table (1)

Working Notes:

Calculate base layer cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Base layer cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Beginning inventory at cost}}{\text{Beginning inventory at retail}}\times 100\right)\\ =\left(\frac{\$90,000}{\$150,000}\times 100\right)\\ =60\%\end{array}$

Calculate current year cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\$482,460}{\$731,000}\times 100\right)\\ =66\%\end{array}$

Calculate the amount of estimated ending inventory at cost.

Ending inventory at dollar-value LIFO retail cost
Ending inventory at year-end retail prices ($)	Ending inventory at base year retail prices ($)	Inventory layers at base year retail prices ($)	Inventory layers converted to cost ($)
206,000	200,000	150,000 (Base)	90,000
		50,000 (2018)	33,990
Total ending inventory at dollar-value LIFO retail cost			123,990

Table (2)

Calculate the amount of ending inventory at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Ending inventory }\\ \text{at base year retail prices }\end{array}\}\text{= }\left(\frac{\text{Estimated ending inventory at retail}}{\text{Retail price index}}\right)\\ =\left(\frac{\$206,000}{1.03}\right)\\ =\$200,000\end{array}$

Calculate the amount of inventory layers at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ base year retail prices }\end{array}\}\text{= Beginning inventory at retail}\\ \text{=\$150,000}\end{array}$

Calculate the amount of inventory layers at current year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ current year retail prices (2018) }\end{array}\}\text{= }\left(\begin{array}{l}\text{Ending inventory at base year retail prices}\\ -\text{Beginning inventory at retail}\end{array}\right)\\ =\$200,000-\$150,000\\ =\$50,000\end{array}$

Calculate the amount of inventory layers converted to cost (Base).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Beginning inventory at retail}\times \\ \text{Base price index}\times \\ \text{Base layer cost-to retail percentage}\end{array}\right)\\ =\left(\$150,000\times 1.00\times 60\%\right)\\ =\$90,000\end{array}$

Calculate the amount of inventory layers converted to cost (2018).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at current year retail prices}\times \\ \text{Retail price index}\times \\ \text{Current year cost-to retail percentage}\end{array}\right)\\ =\left(\$50,000\times 1.03\times 66\%\right)\\ =\$33,990\end{array}$

Calculate the amount of estimated ending inventory and cost of goods sold at retail.

Details	Cost ($)	Retail ($)
Beginning inventory	123,990	206,000
Add: Net purchase	511,000	760,000
Freight-in	8,000
Net markups		10,000
Less: Net markdowns		(6,000)
Purchase returns	(2,200)	(4,000)
Goods available for sale – Excluding beginning inventory	516,800	760,000
Goods available for sale – Including beginning inventory	640,790	966,000
Less: Normal spoilage	0	(6,600)
Net sales		(697,500)
Employees discounts		(7,500)
Estimated ending inventory at current year retail prices		254,400
Estimated ending inventory at cost (Refer Table 4)	(152,822)
Estimated Cost of Goods Sold	487,968

Table (3)

Working Notes:

Calculate base layer cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Base layer cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Beginning inventory at cost}}{\text{Beginning inventory at retail}}\times 100\right)\\ =\left(\frac{\$90,000}{\$150,000}\times 100\right)\\ =60\%\end{array}$

Calculate 2018 year cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\$482,460}{\$731,000}\times 100\right)\\ =66\%\end{array}$

Calculate current year cost-to retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Current year cost-to}\\ \text{ retail percentage}\end{array}\}\text{ = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\$516,800}{\$760,000}\times 100\right)\\ =68\%\end{array}$

Calculate the amount of estimated ending inventory at cost.

Ending inventory at dollar-value LIFO retail cost
Ending inventory at year-end retail prices ($)	Ending inventory at base year retail prices ($)	Inventory layers at base year retail prices ($)	Inventory layers converted to cost ($)
254,400	240,000	150,000 (Base)	90,000
		50,000 (2018)	33,990
		40,000 (2019)	28,832
Total ending inventory at dollar-value LIFO retail cost			152,822

Table (4)

Calculate the amount of ending inventory at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Ending inventory }\\ \text{at base year retail prices }\end{array}\}\text{= }\left(\frac{\text{Estimated ending inventory at retail}}{\text{Retail price index}}\right)\\ =\left(\frac{\$254,400}{1.06}\right)\\ =\$240,000\end{array}$

Calculate the amount of inventory layers at base year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ base year retail prices }\end{array}\}\text{= Beginning inventory at retail}\\ \text{=\$150,000}\end{array}$

Calculate the amount of inventory layers at current year retail prices.

$\begin{array}{c}\begin{array}{l}\text{Inventory layers at}\\ \text{ current year retail prices (2018) }\end{array}\}\text{= }\left(\begin{array}{l}\text{Ending inventory at base year retail prices}\\ -\text{Beginning inventory at retail}\end{array}\right)\\ =\$240,000-\$150,000\\ =\$90,000\end{array}$

Calculate the amount of inventory layers converted to cost (Base).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Beginning inventory at retail}\times \\ \text{Base price index}\times \\ \text{Base layer cost-to retail percentage}\end{array}\right)\\ =\left(\$150,000\times 1.00\times 60\%\right)\\ =\$90,000\end{array}$

Calculate the amount of inventory layers converted to cost (2018).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at 2018 year retail prices}\times \\ \text{Retail price index}\times \\ \text{2018 year cost-to retail percentage}\end{array}\right)\\ =\left(\$50,000\times 1.03\times 66\%\right)\\ =\$33,990\end{array}$

Calculate the amount of inventory layers converted to cost (2019).

$\begin{array}{c}\begin{array}{l}\text{Inventory layers}\\ \text{ converted to cost }\end{array}\}\text{=}\left(\begin{array}{l}\text{Inventory layers at current year retail prices}\times \\ \text{Retail price index}\times \\ \text{Current year cost-to retail percentage}\end{array}\right)\\ =\left(\$40,000\times 1.06\times 68\%\right)\\ =\$28,832\end{array}$

To determine

Average cost

It is amethod of determining the cost-to retail percentage for all the goods available for sale.

To Calculate: The amount of ending inventory and cost of goods sold.

Explanation of Solution

The following table shows the ending inventory and cost of goods sold.

Details	Cost ($)	Retail ($)
Beginning inventory	90,000	150,000
Add:  Net purchase	478,000	730,000
Freight-in	6,960
Net markups		8,500
Less: Purchase Returns	(2,500)	(3,500)
Net markdowns		(4,000)
Goods available for sale	572,460	881,000
Less: Normal spoilage		(5,000)
Net sales		(664,000)
Employees discounts		(6,000)
Estimated ending inventory at retail		206,000
Estimated ending inventory at cost(1)	(133,859)
Estimated Cost of Goods Sold	438,601

Table (5)

Working Note:

Calculate cost-to-retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Cost-to-retail}\\ \text{ percentage }\end{array}\}=\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\text{\$572,460}}{\$881,000}\times 100\right)\\ =64,98\%\end{array}$

Calculate the amount of estimated ending inventory at cost.

$\begin{array}{c}\begin{array}{l}\text{Estimated ending }\\ \text{inventory at cost}\end{array}\}=\left(\begin{array}{l}\text{Estimated ending inventory at retail}\\ \times \text{Cost-to-retail percentage}\end{array}\right)\\ =\text{\$206,000}\times 64.98\text{\%}\\ =\text{\$133,859}\end{array}$ (1)

To determine

Conventional Retail Method

Conventional retail method refers to the estimation of the lower of average cost or market by eliminating the markdowns from the calculation of the cost-to-retail percentage.

In this case, the cost-to-retail percentage will be determined by dividing the goods available for sale at cost by the goods available for at retail (excluding markdowns). Thus, the conventional retail method will always result in lower estimation of ending inventory when the markdowns exist.

To Calculate: The amount of ending inventory and cost of goods sold.

Explanation of Solution

The following table shows the ending inventory and cost of goods sold.

Details	Cost ($)	Retail ($)
Beginning inventory	90,000	150,000
Add:  Net purchase	478,000	730,000
Freight-in	6,960
Net markups		8,500
Less: Purchase Returns	(2,500)	(3,500)
Net markdowns		(4,000)
Goods available for sale	572,460	881,000
Less: Normal spoilage		(5,000)
Net sales		(664,000)
Employees discounts		(6,000)
Estimated ending inventory at retail		206,000
Estimated ending inventory at cost(2)	(133,241)
Estimated Cost of Goods Sold	439,219

Table (6)

Working Note:

Calculate cost-to-retail percentage.

$\begin{array}{c}\begin{array}{l}\text{Cost-to-retail}\\ \text{ percentage }\end{array}\}=\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ =\left(\frac{\text{\$572,460}}{\$885,000}\times 100\right)\\ =64.68\%\end{array}$

Calculate the amount of estimated ending inventory at cost.

$\begin{array}{c}\begin{array}{l}\text{Estimated ending }\\ \text{inventory at cost}\end{array}\}=\left(\begin{array}{l}\text{Estimated ending inventory at retail}\\ \times \text{Cost-to-retail percentage}\end{array}\right)\\ =\text{\$206,000}\times 64.68\text{\%}\\ =\text{\$133,241}\end{array}$ (2)