Question

Pearl Company began operations on January 1, 2016, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2016 and, because there was no beginning inventory, its ending inventory for 2016 of $38,000 would have been the same under either the conventional retail system or the LIFO retail system.

On December 31, 2017, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2017, inventory would appear under both systems. All pertinent data regarding purchases, sales, markups, and markdowns are shown below. There has been no change in the price level.

Cost
Retail
Inventory, Jan. 1, 2017 $38,000 $59,600
Markdowns (net) 12,800
Markups (net) 22,000
Purchases (net) 129,900 175,400
Sales (net) 166,400

Determine the cost of the 2017 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method. (Round ratios for computational purposes to 2 decimal place, e.g. 78.72% and final answers to 0 decimal places, e.g. 28,987.)

(a) Ending inventory using conventional retail method
$
(b) Ending inventory LIFO retail method
$

Answer 1

Let us compute :

Cost-Retail Ratio = {38000(Cost of beginning inventory)+129900 (Cost of purchases) } devided by {Retail Value of beginning Inventory 59,600 + Retail Value of Purchases175,400 + Mark up 22000} *100 = 65.33%

(a) Cost of Ending inventory under Conventional Retail Method :

Retail Value of Ending Inventory = {Retail Value of beginning Inventory 59,600 + Retail Value of Purchases175,400 + Mark up 22000} - {Sales 166,400 + Mark down 12,800} =77,800

Cost on ending inventory = 77,800*65.33% =50827.

(b) Cost of Ending inventory under LIFO

Cost of Sales = Sales Value -Mark up + Mark down = 166400-22000+12800= 157200

LIFO - as the recent purchases must have gone put first = 157200-129900 (purchases out)= 27300 (beginning inventory out)

Cost of end inventory = 38000-27300= 9700.