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Q15P.

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Intermediate Accounting (Kieso)
Found in: Page 488

Short Answer

Davenport Department Store converted from the conventional retail method to the LIFO retail method on January 1, 2017, and is now considering converting to the dollar-value LIFO inventory method. During your examination of the financial statements for the year ended December 31, 2018, management requested that you furnish a summary showing certain computations of inventory cost for the past 3 years. Here is the available information. 1. The inventory at January 1, 2016, had a retail value of $56,000 and cost of $29,800 based on the conventional retail method. 2. Transactions during 2016 were as follows. Cost Retail Purchases $311,000 $554,000 Purchase returns 5,200 10,000 Purchase discounts 6,000 Gross sales revenue (after employee discounts) 551,000 Sales returns 9,000 Employee discounts 3,000 Freight-in 17,600 Net markups 20,000 Net markdowns 12,000 3. The retail value of the December 31, 2017, inventory was $75,600, the cost ratio for 2017 under the LIFO retail method was 61%, and the regional price index was 105% of the January 1, 2017, price level. 4. The retail value of the December 31, 2018, inventory was $62,640, the cost ratio for 2018 under the LIFO retail method was 60%, and the regional price index was 108% of the January 1, 2017, price level. Instructions (a) Prepare a schedule showing the computation of the cost of inventory on hand at December 31, 2016, based on the conventional retail method. (b) Prepare a schedule showing the recomputation of the inventory to be reported on December 31, 2016, in accordance with procedures necessary to convert from the conventional retail method to the LIFO retail method beginning January 1, 2017. Assume that the retail value of the December 31, 2016, inventory was $60,000. (c) Without prejudice to your solution to part (b), assume that you computed the December 31, 2016, inventory (retail value $60,000) under the LIFO retail method at a cost of $33,300. Prepare a schedule showing the computations of the cost of the store’s 2017 and 2018 year-end inventories under the dollar-value LIFO method.

  1. Ending inventory at cost equals $35,280.
  2. Ending inventory equals $34,500.
  3. Ending inventory in 2017 equals $40,986, and in 2018 equals $32,190.
See the step by step solution

Step by Step Solution

Step1: Calculation of ending inventory at retail

a. Ending inventory at retail is calculated as follows:

Cost

Retail

Beginning inventory

$29,800

$56,000

Purchases

311,000

554,000

Purchase returns

(5,200)_

(10,000)

Purchase discounts

(6,000)

Freight in

17,600

Total

Add: Net markups

20,000

Totals

347,200

620,000

Deduct: Net Markdowns

12,000

Sales price of goods available

608,000

Deduct: Sales (net) ($551,000-$9,000)

542,000

Deduct: Employee discounts

3,000

Ending inventory at retail

$63,000

Cost to retail ratio (347,200/620,000)

56%

Ending inventory at cost ($63,000*56%)

$35,280

Step2: Calculation of inventory under LIFO Retail method

b. Inventory value under LIFO retail is calculated as follows:

Cost

Retail

Beginning inventory

$29,800

$56,000

Purchases

311,000

554,000

Purchase returns

(5,200)_

(10,000)

Purchase discounts

(6,000)

Freight in

17,600

Add: Net markups

20,000

Deduct: Net Markdowns

12,000

Total excluding beginning inventory

317,400

552,000

Cost to retail ratio under LIFO retail method ($317,400/$552,000)

57.5%

Inventory cost under LIFO retail method ($60,000 x 57.5%)

$34,500

Step 3: Calculation of ending inventory under the dollar-value LIFO retail method on December 31, 2017, and 2017

The ending inventory is calculated as follows for December 31,2017

Ending inventory at retail

$72,000

Beginning inventory at retail

60,000

Increase in inventory in retail

$12,000

Increase in terms of Year 2017 price ($12000 x 105%)

$12,600

Ending inventory at retail on LIFO basis

First layer ((33,300/60000) x 60,000 )

$33,300

Second layer ($12,600x 61%)

7,686

$40,986

*cost to retail ratio beginning inventory = $33,300/$60,000 = 55.5%

The ending inventory is calculated as follows for December 31, 2018.

Ending inventory

$62,640

Ending inventory in terms of Year 2018 price ($62,640/108%)

$58,000

Ending inventory per LIFO cost ($58,000 x 55.5%)

$32,190

Thus, inventory value in (a) equals $35,280, in (b) equals $34,500, and in (c) for year 2017 it equals $40,986, and for 2018 it equals $32,190.

Most popular questions for Business-studies Textbooks

Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1993, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox’s fiscal year, November 30, 2017, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods $647,000 Work in process 112,500 Raw materials 264,000 Factory supplies 69,000 The following information relates to Maddox’s inventory and operations. 1. The finished goods inventory consists of the items analyzed below. Cost NRV Down tube shifter Standard model $ 67,500 $ 67,000 Click adjustment model 94,500 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000 Bar end shifter Standard model 83,000 90,050 Click adjustment model 99,000 97,550 Total bar end shifters 182,000 187,600 Head tube shifter Standard model 78,000 77,650 Click adjustment model 117,000 119,300 Total head tube shifters 195,000 196,950 Total fi nished goods $647,000 $650,550 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20% above the current market price. The NRV of the rest of the raw materials is $127,400. 5. The total NRV of the work in process inventory is $108,700. 6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900. 7. Maddox applies the LCNRV method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the LCNRV method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole. Instructions (a) Prepare the inventory section of Maddox’s balance sheet as of November 30, 2017, including any required note(s). (b) Without prejudice to your answer to (a), assume that the NRV of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2017. (c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2017, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2017. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2017.

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