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Chapter 9: Q9P. (page 485)

Presented below is information related to Waveland Inc. Cost Retail Inventory, 12/31/17 \(250,000 \) 390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 — Gross sales revenue (after employee discounts) — 1,410,000 Sales returns — 97,500 Markups — 120,000 Markup cancellations — 40,000 Markdowns — 45,000 Markdown cancellations — 20,000 Freight-in 42,000 — Employee discounts granted — 8,000 Loss from breakage (normal) — 4,500 486 Chapter 9 Inventories: Additional Valuation Issues Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2018.

Short Answer

Expert verified

Ending inventory at cost equals $305,000.

Step by step solution

01

Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows:

Cost

Retail

Beginning inventory

$250,000

$390,000

Purchases

914,500

1,460,000

Purchase returns

(60,000)

(80,000)

Purchase discounts

(18,000)

Freight in

42,000

Total

1,128,500

1,770,000

Add: Net markups

Markups

120,000

Markup cancellations

40,000

80,000

Totals

1,128,500

1,850,000

Deduct: Net Markdowns

Markdowns

45,000

Markdown cancellations

20,000

25,000

Sales price of goods available

1,825,000

Deduct: Sales (net) ($1,410,000-$97,500)

1,312,500

Deduct: Inventor loss due to breakage

4,500

Deduct: Employee discounts

8,000

Ending inventory at retail

$500,000

02

Calculation of the cost-to-retail ratio

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

Cost-to-RetailRatio=InventoryatCostInventoryatRetail=$1,128,500$1,850,000=61%

03

Calculation of ending inventory at cost

Ending inventory at cost is calculated as follows:

EndingInventoryatCost=EndingInventoryatRetail×Cost-to-RetailRatio=$500,000×61%=$305,000

Thus, ending inventory at cost equals $305,000.

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Most popular questions from this chapter

What conditions must exist for the retail inventory method to provide valid results?

Reed Pentak, a finance major, has been following globalization and made the following observation concerning accounting convergence: “I do not see many obstacles concerning development of a single accounting standard for inventories.” Prepare a response to Reed to explain the main obstacle to achieving convergence in the area of inventory accounting

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Starfish Company (a company using GAAP and the LIFO inventory method) is considering changing to IFRS and the FIFO inventory method. How would a comparison of these methods affect Starfish’s financials? (a) During a period of inflation, working capital would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (b) During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. During a period of inflation, net income would be greater if IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (d) During a period of inflation, the current ratio would decrease when IFRS and the FIFO inventory methodare used as compared to GAAP and LIFO.
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