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Q14P.

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Intermediate Accounting (Kieso)
Found in: Page 488

Short Answer

GROUPWORK (Retail, LIFO Retail, and Inventory Shortage) Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year. Cost Retail Beginning inventory $ 68,000 $100,000 Purchases 255,000 400,000 Net markups 50,000 Net markdowns 110,000 Sales revenue 320,000 According to the November 30, 2017, physical inventory, the actual inventory at retail is $115,000. Instructions (a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method. (b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations. Problems 487 488 Chapter 9 Inventories: Additional Valuation Issues (c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017. (d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.

  1. Ending inventory at cost equals $23,700.
  2. Ending inventory at LIFO cost equals $23,615.
See the step by step solution

Step by Step Solution

Step1: Calculation of ending inventory at cost

a. Ending inventory at retail is shown as follows:

Cost

Retail

Beginning inventory

$15,800

$24,000

Net purchases

116,200

184,000

Net markups

12,000

Total

$132,000

$220,000

Net markdowns

5,500

Sale price of goods available

255,000

$214,500

Sales

323,000

175,000

Ending inventory at retail

$39,500

Cost to retail ratio ($132,000/$220,000)

60%

Ending inventory at cost ($39,500*60%)

$23,700

Step 2: Calculation of ending inventory at LIFO Cost

a. Ending inventory at retail is shown as follows:

Cost

Retail

Beginning inventory

$15,800

$24,000

Net purchases

116,200

184,000

Net markups

12,000

Net markdowns

(5,500)

Total excluding beginning inventory

116,200

190,500

Total including beginning inventory

132,000

214,500

Net sales during the period

(175,000)

Ending inventory at retail

$39,500

Cost-to-retail ratio under the assumption of LIFO retail ($116,200/$190,500)

61%

Cost-to-retail ratio of beginning inventory

59%

Ending Inventory at Retail

Layers at Retail Prices

Cost-to-Retail Percentage

Ending inventory at LIFO cost

$39,500

$24,000

x

59%

=

$14,160

15,500

x

61%

=

9,455

$39,500

$23,615

Thus, ending inventory in (a) equals $23,700, and in (b) equals $23,615.

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