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Chapter 9: Q15P. (page 488)

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.

Short Answer

Expert verified
  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.

Step by step solution

01

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

02

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

03

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.

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Most popular questions from this chapter

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)

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