Question

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

Answer 1

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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