Question

Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2016 are as follows:

Cost Reatail

Begining inventory. $90,000. $180,000

Purchases 335,000. 580,000

Freight in 9,000   

Purchase returns. 7,000 11,000

Net markups 16,000

Net markdowns 12,000

Normal spoilage 3,000

Abnormal spoliage. 4,800 8,000

Sales 540,000

Sales returns 10,000

The company records sales net of employee discounts. Discounts for 2016 totaled $4,000.

Required:

Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the following applications:

1. Average cost

2. Conventional

Answer 1

1
		COST	RETAIL
	Beginning inventory	$90,000	$180,000
	Add: Purchases	$335,000	$580,000
	Add: Freight in	$9,000
	Less: Purchase returns	($7,000)	($11,000)
	Add: Net markups		$16,000
	Less: Net markdowns		($12,000)
	Abnormal spoilage	($4,800)	($8,000)
	Goods available for sale	$422,200	$745,000	56.67%
	Cost-to-retail: ($422,200/$745,000 = 56.67%)
	Less: Normal spoilage		($3,000)
	Net sales ($540,000 - $10,000)		($530,000)
	Employee discounts		($4,000)
	Estimated ending inventory at retail		$208,000
	Estimated ending inventory at cost	($117,874)
	($208,000 x 56.67%)
	Estimated cost of goods sold	$304,326
2		COST	RETAIL
	Beginning inventory	$90,000	$180,000
	Add: Purchases	$335,000	$580,000
	Add: Freight in	$9,000
	Less: Purchase returns	($7,000)	($11,000)
	Add: Net markups		$16,000
	Abnormal spoilage	($4,800)	($8,000)
	Goods available for sale	$422,200	$757,000	55.77%
	Cost-to-retail: ($422,200/$757,000 = 55.77%)
	Less: Net markdowns		($12,000)
	Less: Normal spoilage		($3,000)
	Net sales ($540,000 - $10,000)		($530,000)
	Employee discounts		($4,000)
	Estimated ending inventory at retail		$208,000
	Estimated ending inventory at cost	($116,002)
	($208,000 x 55.77%)
	Estimated cost of goods sold	$306,198