Question

In: Accounting

Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold....

Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2018 are as follows:

Cost Retail
Beginning inventory $ 87,000 $ 177,000
Purchases 359,000 577,000
Freight-in 8,700
Purchase returns 6,700 10,700
Net markups 15,700
Net markdowns 11,700
Normal spoilage 2,700
Abnormal spoilage 4,240 7,700
Sales 537,000
Sales returns 9,700


The company records sales net of employee discounts. Discounts for 2018 totaled $3,700.

Required:
1. Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the average cost application.
2. Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the conventional application.

Average cost application Conventional application
Estimated ending inventory at retail
Estimated ending inventory at cost
Estimated cost of goods sold

Solutions

Expert Solution

1. retail inventory method and average cost application

Cost retail
Beg. Inventory 87000 177000
ADD: Purchases 359000 577000
freight in 8700
Less: Purchase return 6700 10700
ADD: Net markups 15700
Less: Net markdowns 11700
Abnormal spoilage 4240 7700
Goods available for sale 443760 739600
Cost/retail%=443760/739600 = 60%
Less: Normal spoilage 2700
Net sales(537000-9700) 527300
Employee discounts 3700
Ending inventory at retail 205900
Ending inventory at cost(60%X205900)         (123,540)
Cost of goods sold           320,220

2. Retail inventory method and the conventional application

Cost retail
Beg. Inventory 87000 177000
ADD: Purchases 359000 577000
freight in 8700
Less: Purchase return 6700 10700
ADD: Net markups 15700
Abnormal spoilage 4240 7700
443760 751300
Cost/retail%=443760/751300 = 59.06%
Less: Net markdowns 11700
Goods available for sale 443760 739600
Less: Normal spoilage 2700
Net sales(537000-9700) 527300
Employee discounts 3700
Ending inventory at retail 205900
Ending inventory at cost(59.06%X205900)         (121,605)
Cost of goods sold           322,155
Particulars Average cost
application
Conventional
application
Estimated ending inventory at retail           205,900             205,900
Estimated ending inventory at cost           123,540             121,605
Estimated cost of goods sold           320,220             322,155

.


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