Question

Alquist Company uses the retail method to estimate its ending inventory. Selected information about its year 2021 operations is as follows:

1. January 1, 2021, beginning inventory had a cost of $100,000 and a retail value of $150,000.
2. Purchases during 2021 cost $1,387,500 with an original retail value of $2,000,000.
3. Freight costs were $10,000 for incoming merchandise.
4. Net additional markups were $300,000 and net markdowns were $150,000.
5. Based on prior experience, shrinkage due to shoplifting was estimated to be $15,000 of retail value.
6. Merchandise is sold to employees at a 20% of selling price discount. Employee sales are recorded in a separate account at the net selling price. The balance in this account at the end of 2021 is $250,000.
7. Sales to customers totaled $1,750,000 for the year.

2. Estimate ending inventory and cost of goods sold using the LIFO retail method. (Assume stable prices.)

	LIFO Retail Method Estimated ending inventory at retail Estimated ending inventory at cost Estimated cost of goods sold

Answer 1

Solution

1. Calculation of Estimated Ending Inventory at retail

	Particulars			Cost	Retail
	Inventory at Beginning			100,000	150,000
Add	Purchases			1,387,500	2,000,000
Add	Freight Cost for Incoming Merchandise			10,000
Add	Markup				300,000
Less	Mark down				(150,000)
	Goods Availaible for Sale( Excluding Beginning Inventory)			1,397,500	2,150,000
	Goods Availaible for Sale( Including Beginning Inventory)			1,497,500	2,300,000
	Cost to Retail Ratio
	Beginning Inventory	100000/150000	67%
	New Purchases	1397500/2150000	65%
Less	Shrinkage due to Shop Lifting				(15,000)
Less	Sales (Net of Discount)
	Customer Sale		(1,750,000)
	Employee Sale (net of Discount)	250000 / 80%	(312,500)		(2,062,500)
	Estimated Ending Inventory at Retail				222,500

2. Calculation of Estimated Ending Inventory at cost

	Particular		Retail	Cost
	Inventory at Beginning		150,000	100,000
Add	Current period layers	72500* 65%	-	47,125
		222500 - 150000	72,500	-
	Estimated Ending Inventory		222,500	147,125

Therefore, estimated ending Inventory at cost = $147,125

3. Calculation of cost of Goods sold

Cost of Goods sold = Goods available for sale (At cost) - Estimated Ending Inventory (at cost)

= $1,497,500 - $147,125

= $1,350,375