Question

Exercise 9-25

Metlock Company began operations late in 2016 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2016 and no markdowns during 2016, the ending inventory for 2016 was $13,818 under both the conventional retail method and the LIFO retail method. At the end of 2017, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2017. The following data are available for computations.

		Cost		Retail
Inventory, January 1, 2017		$13,818		$20,500
Sales revenue				78,000
Net markups				8,800
Net markdowns				1,700
Purchases		60,100		79,000
Freight-in		1,892
Estimated theft				1,900

Compute the cost of the 2017 ending inventory under both:

(a) The conventional retail method. (Round ratios for computational purposes to 0 decimal places, e.g. 78% and final answer to 0 decimal places, e.g. 28,987.)

Ending inventory using the conventional retail method

$

(b) The LIFO retail method. (Round ratios for computational purposes to 0 decimal places, e.g. 78% and final answers to 0 decimal places, e.g. 28,987.)

Ending inventory at cost		$
Ending inventory at retail		$

Answer 1

Ans.

Ending Inventory:-

Ending inventory is the value of goods available for sale at the end of accounting period. It is the beginning inventory plus net purchases minus cost of goods sold. The retail inventory method are as follows:

• Conventional retail inventory method:- It is based on the relationship between a product's cost and its retail price.The retail inventory method requires a business to know the total cost and its retail value of its goods, the total cost and retail value of goods available for sale.
• LIFO retail inventory method:- A LIFO retail inventory method used by retailers to achieve the LIFO cost flow without tracking individual units.This method is used to estimate ending inventory and is acceptable for financial reporting purposes.

a. The conventional retail method.

	Cost ($)	Retail ($)
Inventory January 1, 2017	13,818	20,500
Purchases	60,100	79,000
Freight in	1,892
Add:- Net markups		8,800
Total Inventories	75,810	108,300
Less: Net markdowns		1,700
Goods available for sale	75,810	106,600
Less: Sales revenue		78,000
Less: Estimated theft		1,900
Ending Inventory at Retail		26,700

Total Inventories at cost	$75,810
Total Inventories at retail	$108,300
Cost to retail ratio %	70%
Ending Inventory at retail	$26,700
Ending Inventory at cost	$18,690

Working Notes:-

1. Cost to retail ratio %=Total inventories at cost / Total inventories at retail x 100

Cost to retail ratio %=$75,810 / $108,300 x 100

Cost to retail ratio %= 70%

2. Ending Inventory at cost=Ending inventory at retail x Cost to retail ratio %

Ending Inventory at cost=$26,700 x 70%

Ending Inventory at cost=$18,690

Hence, the ending inventory at cost is $18,690 and ending inventory at retail is $26,700 by using the conventional retail method.

b. The LIFO retail method.

	Cost ($)	Retail ($)
Inventory January 1, 2017	13,818	20,500
Purchases	60,100	79,000
Freight in	1,892
Add:- Net markups		8,800
Total Inventories	75,810	108,300
Less: Net markdowns		1,700
Goods available for sale (Excluding beginning inventory)	61,992	86,100
Goods available for sale (Including beginning inventory)	75,810	106,600
Less: Sales revenue		78,000
Less: Estimated theft		1,900
Ending Inventory at Retail		26,700

Goods available for sale at cost (Excluding beginning inventory)	$61,992
Goods available for sale at retail (Excluding beginning inventory)	$86,100
Cost to retail ratio %	72%

	Cost ($)	Retail ($)
Beginning Inventory	13,818	20,500
Cost to retail ratio %	72%	28%
Current Period Layer	4,464	6,200
Ending Inventory	18,282	26,700

Working Notes:-

a. Cost to retail ratio %=Goods available for sale at cost (Excluding beginning inventory) / Goods available for sale at retail (Excluding beginning inventory)x 100

Cost to retail ratio %=$61,992 / $86,100 x 100

Cost to retail ratio %= 72%

1. Current period layer for retail=Ending inventory at retail - Beginning Inventory at retail

Current period layer for retail=$26,700 - $20,500

Current period layer for retail=$6,200

2. Current period layer for cost=Current period layer for retail x Cost to retail ratio %

Current period layer for cost=$6,200 x 72%

Current period layer for cost=$4,464

Hence, ending inventory at cost is $18,282 and ending inventory at retail is $26,700 by using the LIFO retail method.