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Question E9-25

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 481

Short Answer

Retail Inventory Method—Conventional and LIFO) Leonard Company began operations late in 2016 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2016 and no markdowns during 2016, the ending inventory for 2016 was $14,000 under both the conventional retail method and the LIFO retail method. At the end of 2017, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2017. The following data are available for computations. Cost Retail Inventory, January 1, 2017 $14,000 $20,000 Sales revenue 80,000 Net markups 9,000 Net markdowns 1,600 Purchases 58,800 81,000 Freight-in 7,500 Estimated theft 2,000 Instructions Compute the cost of the 2017 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method

  1. Ending inventory is $19,272.
  2. Ending inventory is $18,800
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Step by Step Solution

Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows:

Cost

Retail

Beginning inventory

$14,000

$20,000

Purchases (net)

58,800

81,000

Freight -in

7,500

______

Totals

80,300

101,000

Add: Net markups

_______

9,000

Totals

80,300

110,000

Deduct: Net markdowns

1,600

Sales price of goods available

108,400

Deduct: Sales (net)

80,000

Deduct: Estimated theft

2,000

Ending inventory at retail

$26,400

Calculation of the cost-to-retail ratio

The cost to retail ratio is calculated as follows:

Calculation of inventory value at cost by conventional retail method

Inventory at cost is calculated as follows:

Calculation of ending inventory at retail for LIFO retail method

Ending inventory at retail is calculated as follows

Cost

Retail

Beginning inventory

$14,000

$20,000

Purchases (net)

58,800

81,000

Freight-in

7,500

Net markups

9,000

Net markdowns

______

1,600

Totals (excluding beginning inventory)

66,300

88,400

Totals (including beginning inventory)

$80,300

108,400

Deduct: Sales (net)

80,000

Deduct: Estimated theft

2,000

Ending inventory at retail

$26,400

Calculation of the cost-to-retail ratio

The cost-to-retail ratio for the LIFO method is calculated as follows:

Calculation of ending inventory at LIFO cost

Ending inventory at LIFO cost is calculated as follows:

Ending Inventory at Retail prices

Layer at Retail Prices

Cost-to-Retail Percentage

Ending Inventory at LIFO cost

$26,400

$20,000

x

70%

$14,000

6,400

x

75%

4,800

$80,000

$18,800

Thus, ending inventory per conventional retail method is $19,272, and the LIFO retail method is $18,800.

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