Chapter 9, Problem 9.5P

1.

To determine

Retail inventory method: It takes into account all the retail amounts that is, the current selling prices. Under this method, the goods available for sale, at retail is deducted from the sales, at retail to determine the ending inventory, at retail.

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	100,000	150,000
Add:  Net purchase	1,387,500	2,000,000
Freight-in	10,000
Net markups		300,000
Less: Net markdowns		(150,000)
Goods available for sale	1,497,500	2,300,000
Less: Normal Shrinkage		(15,000)
Sales to customers		(1,750,000)
Sales to employees		(250,000)
Employee discounts		(62,500)
Estimated ending inventory at retail		222,500
Estimated ending inventory at cost	(135,992) (1)
Estimated cost of goods sold	1,361,508

Table (1)

Working Note:

Calculate cost-to-retail percentage.

$\begin{array}{c}\text{Cost-to-retail percentage = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ \text{= }\left(\frac{\text{\$1,497,500}}{\text{\$2,450,000}}\times 100\right)\\ =61.12\%\end{array}$

Calculate the amount of estimated ending inventory at cost.

$\begin{array}{c}\begin{array}{l}\text{Estimated ending }\\ \text{inventory at cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Estimated ending inventory at retail}\\ \times \text{Cost to retail percentage}\end{array}\right)\\ \text{= }\left(\text{\$222,500}\times \text{61}\text{.12\%}\right)\\ =\$135,992\end{array}$ (1)

Conclusion

Therefore, the amount of ending inventory and cost of goods sold (conventional) at cost are $222,500 and $1,361,508.

2.

To determine

Last-In, First-Out (LIFO): In Last-in-First-Out method, the costs of last purchased items are sold first. The value of the closing stock consists the initial purchased items.

To Estimate: the amount of ending inventory and cost of goods sold (LIFO).

Explanation of Solution

Estimate the amount of ending inventory and cost of goods sold (LIFO).

Details	Cost ($)	Retail ($)
Beginning inventory	100,000	150,000
Add:  Net purchase	1,387,500	2,000,000
Freight-in	10,000
Net markups		300,000
Less: Net markdowns		(150,000)
Goods available for sale (excluding beginning inventory)	1,397,500	2,150,000
Goods available for sale (including beginning inventory)	1,497,500	2,300,000
Less: Normal Shrinkage		(15,000)
Sales to customers		(1,750,000)
Sales to employees		(250,000)
Employee discounts		(62,500)
Estimated ending inventory at retail		222,500
Estimated ending inventory at cost	(147,125) (3)
Estimated cost of goods sold	1,350,375

Table (2)

Working Notes:

Calculate cost-to-retail percentage:

$\begin{array}{c}\text{Cost-to-retail percentage = }\left(\frac{\text{Goods available for sale at cost}}{\text{Goods available for sale at retail}}\times 100\right)\\ \text{= }\left(\frac{\text{\$1,397,500}}{\text{\$2,150,000}}\times 100\right)\\ =65\%\end{array}$ (2)

Calculate the amount of estimated ending inventory at cost:

$\begin{array}{c}\begin{array}{l}\text{Estimated ending }\\ \text{inventory at cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Estimated ending inventory at retail}\\ \times \text{Cost to retail percentage}\end{array}\right)\\ =\left[\begin{array}{l}\text{Beginning inventory at cost }\\ \text{+}\left(\begin{array}{l}\text{Current period' layer at retail}\\ \times \text{}\text{Cost-to-retail percentage}\end{array}\right)\end{array}\right]\\ \text{= }\left[\text{\$100,000 +}\left(\begin{array}{l}\$72,500\\ \times \text{65\%(2)}\end{array}\right)\right]\\ =\$100,000+\$47,125\\ =\$147,125\end{array}$ (3)

Conclusion

Therefore, the amount of ending inventory and cost of goods sold (LIFO) at cost are $222,500 and $1,350,375