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Chapter 9: Question E9-22 (page 480)

The records of Ellen鈥檚 Boutique report the following data for the month of April. Sales revenue \(99,000 Purchases (at cost) \)48,000 Sales returns 2,000 Purchases (at sales price) 88,000 Markups 10,000 Purchase returns (at cost) 2,000 Markup cancellations 1,500 Purchase returns (at sales price) 3,000 Markdowns 9,300 Beginning inventory (at cost) 30,000 Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500 Freight on purchases 2,400 Instructions Compute the ending inventory by the conventional retail inventory method

Short Answer

Expert verified

The ending inventory by conventional retail inventory method equals $20,440.

Step by step solution

01

Calculation of ending inventory at retail

Calculation of ending inventory at retail is calculated as follows:


Cost


Retail

Beginning inventory

$30,000


$46,500

Purchases

48,000


88,000

Purchase returns

-2,000


-3,000

Freight on purchases

2,400


_________

Totals

78,400


131,500

Add: Net markups




Markups


10,000


Markup cancellations

_______

1,500

8,500

Totals

78,400


140,000

Deduct: Net markdowns




Markdowns


9,300


Markdowns cancellations


2,800

6,500

Sales price of goods available



133,500

Deduct: Net Sales




Sales revenue


99,000


Sales returns


2,000

97,000

Ending inventory at retail



$36,500

02

Calculation of the cost-to-retail ratio

The cost to retail ratio is calculated as follows:

Cost鈥�to鈥�RetailRatio=InventoryatCostInventoryatRetail=$78,400$140,000=56%

03

Calculation of inventory value at cost

Inventory at cost is calculated as follows:

EndingInventoryatCost=InventoryatRetail脳Cost鈥�to鈥�RetailRatio=$36,500脳56%=$20,440

Thus, ending inventory at cost is $20,440.

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Most popular questions from this chapter

Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation鈥檚 books disclosed the following. Beginning inventory \(170,000 Sales revenue \)650,000 Purchases for the year 390,000 Sales returns 24,000 Purchase returns 30,000 Rate of gross profi t on net sales 40% Merchandise with a selling price of \(21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of \)15,000 had a net realizable value of $5,300. Instructions Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was \(38,000. Purchases since January 1 were \)72,000; freight-in, \(3,400; purchase returns and allowances, \)2,400. Sales are made at 331 /3% above cost and totaled \(100,000 to March 9. Goods costing \)10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331 /3% of sales.

Dover Company began operations in 2017 and determined its ending inventory at cost and at LCNRV at December 31, 2017, and December 31, 2018. This information is presented below. Cost Net Realizable Value 12/31/17 \(346,000 \)322,000 12/31/18 410,000 390,000 Instructions (a) Prepare the journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual inventory system using the cost-of-goods-sold method. (b) Prepare journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual system using the loss method. (c) Which of the two methods above provides the higher net income in each year?

Eastman Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the followingInventory (beginning) \( 80,000 Sales revenue \)415,000 Purchases 290,000 Sales returns 21,000 Purchase returns 28,000 Gross profi t % based on net selling price 35%Merchandise with a selling price of \(30,000 remained undamaged after the fire, and damaged merchandise has a net realizable value of \)8,150. The company does not carry fire insurance on its inventory. Instructions Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)

Question:The conventional retail inventory method yields results that are essentially the same as those yielded by the lower-of-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.
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