Chapter 9, Problem 9.7P

Retail inventory method; conventional and LIFO

• LO9–3, LO9–4

Alquist Company uses the retail method to estimate its ending inventory. Selected information about its year 2018 operations is as follows:

1. a. January 1, 2018, beginning inventory had a cost of $100,000 and a retail value of $150,000.
2. b. Purchases during 2018 cost $1,387,500 with an original retail value of $2,000,000.
3. c. Freight costs were $10,000 for incoming merchandise.
4. d. Net additional markups were $300,000 and net markdowns were $150,000.
5. e. Based on prior experience, shrinkage due to shoplifting was estimated to be $15,000 of retail value.
6. f. Merchandise is sold to employees at a 20% of selling price discount. Employee sales are recorded in a separate account at the net selling price. The balance in this account at the end of 2018 is $250,000.
7. g. Sales to customers totaled $1,750,000 for the year.

Required:

1. 1. Estimate ending inventory and cost of goods sold using the conventional retail method.
2. 2. Estimate ending inventory and cost of goods sold using the LIFO retail method. (Assume stable prices.)

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.

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

Calculate the amount of estimated ending inventory at cost.

$\begin{array}{c}\begin{array}{l}\text{Estimated ending }\\ \text{inventory at cost}\end{array}\}=\left(\begin{array}{l}\text{Estimated ending inventory at retail}\\ \times \text{Cost-to-retail percentage}\end{array}\right)\\ =\text{\$222,500}\times 61.12\text{\%}\\ =\text{\$135,992}\end{array}$ (1)

Conclusion

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

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:

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

Calculate the amount of estimated ending inventory at cost:

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

Conclusion

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