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Chapter 9: Q10P. (page 486)

Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2018. Inventory, October 1, 2018 At cost \( 52,000 At retail 78,000 Purchases (exclusive of freight and returns) At cost 272,000 At retail 423,000 Freight-in 16,600 Purchase returns At cost 5,600 At retail 8,000 Markups 9,000 Markup cancellations 2,000 Markdowns (net) 3,600 Normal spoilage and breakage 10,000 Sales revenue 390,000 Instructions (a) Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-or-market inventory for October 31, 2018. (b) A department store using the conventional retail inventory method estimates the cost of its ending inventory as \)60,000. An accurate physical count reveals only $47,000 of inventory at lower-of-cost-or-market. List the factors that may have caused the difference between the computed inventory and the physical count.

Short Answer

Expert verified
  1. Ending inventory at cost equals $64,588.
  2. The difference may be due to incorrect estimation of markup and markdown, theft and spoilage of inventory, the difference in cost-to retail ratio, higher abnormal shortage, etc.

Step by step solution

01

Calculation of ending inventory per Lower-of-Cost-or-Market

Ending inventory at retail is calculated as follows:


Cost

Retail

Beginning inventory

$52,000

$78,000

Purchases

272,000

423,000

Purchase returns

(5,600)

(8,000)

Freight in

16,600

Total

335,000

493,000

Add: Net markups

Markups

$9,000

Markup cancellations

_______

2,000

7,000

Totals

333,000

500,000

Deduct: Net Markdowns

3,600

Sales price of goods available

496,400

Deduct: Sales (net)

390,000

Deduct: Normal spoilage and breakage

10,000

Ending inventory at retail

$96,400

Ending inventory at cost (96,400*67%)

$64,588

Ending inventory as per Lower-of-cost-or-market

$64,588

02

Calculation of cost-to-retail ratio

The cost-to-retail ratio is calculated as follows:

Cost-to-RetailRatio=InventoryatCostInventoryatRetail=$335,000$500,000=67%

03

Factors of difference between computed inventory and physical count

  • The factors are as follows:
  • Wrong estimations of markups and markdowns
  • Theft and spoilage of inventory
  • Abnormal shortages
  • The difference in the cost-to-retail ratio related to the inventories
  • Incorrect estimation of net sales revenue

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Most popular questions from this chapter

The financial statements of ConAgra Foods, Inc.’s 2014 annual report disclose the following information. (in millions) 2014 2013 2012 Year-end inventories \(2,201 \)2,077 \(2,341 Fiscal Year 2014 2013 Net sales \)17,703 $15,427 Cost of goods sold 13,980 11,864 Net income 315 786Instructions Compute ConAgra’s (a) inventory turnover and (b) the average days to sell inventory for 2014 and 2013.

As of January 1, 2017, Aristotle Inc. adopted the retail method of accounting for its merchandise inventory. To prepare the store’s financial statements at June 30, 2017, you obtain the following data. Cost Selling Price Inventory, January 1 \( 30,000 \) 43,000 Markdowns 10,500 Markups 9,200 Markdown cancellations 6,500 Markup cancellations 3,200 Purchases 104,800 155,000 Sales revenue 154,000 Purchase returns 2,800 4,000 Sales returns and allowances 8,000 Instructions (a) Prepare a schedule to compute Aristotle’s June 30, 2017, inventory under the conventional retail method of accounting for inventories. (b) Without prejudice to your solution to part (a), assume that you computed the June 30, 2017, inventory to be $59,400 at retail and the ratio of cost to retail to be 70%. The general price level has increased from 100 at January 1, 2017, to 108 at June 30, 2017. Prepare a schedule to compute the June 30, 2017, inventory at the June 30 price level under the dollarvalue LIFO retail method. (AICPA adapted)

The records for the Clothing Department of Sharapova’s Discount Store are summarized below for the month of January. Inventory, January 1: at retail \(25,000; at cost \)17,000 Purchases in January: at retail \(137,000; at cost \)82,500 Freight-in: \(7,000 Purchase returns: at retail \)3,000; at cost \(2,300 Transfers in from suburban branch: at retail \)13,000; at cost \(9,200 Net markups: \)8,000 Net markdowns: \(4,000 Inventory losses due to normal breakage, etc.: at retail \)400 Sales revenue at retail: \(95,000 Sales returns: \)2,400 Instructions (a) Compute the inventory for this department as of January 31, at retail prices. (b) Compute the ending inventory using lower-of-average-cost-or-market

Referring to the situation in P9-2 for Garcia Home Improvement Company, consider the following expanded data at May 31, 2017. Assume Garcia uses LIFO inventory costing. Problems 483 Replacement Sales Net Realizable Normal Cost Cost Price Value Profi t Aluminum siding \( 70,000 \) 62,500 \( 64,000 \) 56,000 \( 5,100 Cedar shake siding 86,000 79,400 94,000 84,800 7,400 Louvered glass doors 112,000 124,000 186,400 168,300 18,500 Thermal windows 140,000 126,000 154,800 140,000 15,400 Total \)408,000 \(391,900 \)499,200 \(449,100 \)46,400 Instructions (a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017. (2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market. (b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories

You are called by Tim Duncan of Spurs Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available. Inventory, July 1 \( 38,000 Purchases—goods placed in stock July 1–15 85,000 Sales revenue—goods delivered to customers (gross) 116,000 Sales returns—goods returned to stock 4,000 Your client reports that the goods on hand on July 16 cost \)30,500, but you determine that this figure includes goods of $6,000 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan’s insurance covers only goods owned. Instructions Compute the claim against the insurance company.
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