Question

Retail Inventory Method

Turner Corporation uses the retail inventory method. The following information relates to 2016:

	Cost	Retail			Cost	Retail
Inventory, January 1	$ 29,000	$ 45,000		Additional markups	—	$ 50,000
Purchases (gross price)	140,000	190,000		Markup cancellations	—	10,000
Purchases discounts taken	3,000	—		Markdowns	—	15,000
Purchases returns	5,000	8,000		Markdown cancellations	—	3,000
Freight-in	20,000	—		Net Sales	—	190,000
Employee discounts	—	3,000

Required:

1. Compute the cost of the ending inventory under each of the following cost flow assumptions: FIFO. Round the cost-to-retail ratio to three decimal places. If required, round to the nearest dollar.

TURNER CORPORATION
Calculation of Ending Inventory by Retail Inventory Method FIFO
For the year 2016
	Cost	Retail
	$	$
	$	$
	$	$
Ending inventory at retail		$
Ending inventory at cost	$

2. Compute the cost of the ending inventory under each of the following cost flow assumptions: Average cost. Round the cost-to-retail ratio to three decimal places. If required, round to the nearest dollar.

TURNER CORPORATION
Calculation of Ending Inventory by Retail Inventory Method Average Cost
For the year 2016
	Cost	Retail
	$	$
	$
Ending inventory at retail		$
Ending inventory at cost	$

3. Compute the cost of the ending inventory under each of the following cost flow assumptions: LIFO. Round the cost-to-retail ratio to three decimal places. If required, round to the nearest dollar.

TURNER CORPORATION
Calculation of Ending Inventory by Retail Inventory Method LIFO
For the year 2016
	Cost	Retail
	$	$
	$	$
	$	$
	$	$
Ending inventory at retail		$
Ending inventory at cost	$

4. Compute the cost of the ending inventory under each of the following cost flow assumptions: Lower of cost or market (based on average cost). Round the cost-to-retail ratio to three decimal places. If required, round to the nearest dollar.

TURNER CORPORATION
Calculation of Ending Inventory by Retail Inventory Method Lower of Cost or Market (based on average cost)
For the year 2016
	Cost	Retail
	$	$
	$	$
Ending inventory at retail		$
Ending inventory at LCM	$

Answer 1

1. FIFO:

	Cost	Retail
Purchases	140,000.00	190,000.00
less: purchase discount taken	-3,000.00
less: purchase returns	-5,000.00	-8,000.00
Freight in	20,000.00
Net additional mark ups		40,000.00
Net markdowns		-12,000.00
	152,000.00	210,000.00
Beginning inventory	29,000.00	45,000.00
Goods available for sale	181,000.00	255,000.00
less: Net sales		-190,000.00
less: employee discounts		-3,000.00
Ending inventory at retail		62,000.00
Ending inventory at cost	44,888.00

Calculations and explanations: Cost to retial ratio = 152,000/210,000 = 0.724

Thus, ending inventory at cost = ending inventory at retail*0.724 = 62,000*0.724 = $44,888

2. Average cost:

	Cost	Retail
Beginning inventory	29,000.00	45,000.00
Purchases	140,000.00	190,000.00
less: purchase discount taken	-3,000.00
less: purchase returns	-5,000.00	-8,000.00
Freight in	20,000.00
Net additional mark ups		40,000.00
Net markdowns		-12,000.00
Goods available for sale	181,000.00	255,000.00
less: net sales and employee discounts		-193,000.00
Ending inventory at retail		62,000.00
Ending inventory at cost	44,020.00

Calculations and explanations:

Cost to retail ratio = 181,000/255,000 = 0.71

Ending inventory at cost = 0.71*62,000 = $44,020

3. LIFO:

	Cost	Retail
Beginning inventory	29,000.00	45,000.00
Purchases	140,000.00	190,000.00
less: purchase discount taken	-3,000.00
less: purchase returns	-5,000.00	-8,000.00
Freight in	20,000.00
Net additional mark ups		40,000.00
Net markdowns		-12,000.00
	152,000.00	210,000.00
Goods available for sale	181,000.00	255,000.00
less: net sales and employee discounts		-193,000.00
Ending inventory at retail		62,000.00
Ending inventory at cost	41,614.00

Calculations and explanations:

Cost to retail ratio (beginning inventory) = 29,000/45,000 = 0.644

Cost to retail ratio = 152,000/210,000 = 0.7240

Thus ending inventory = 45,000*0.644 + 17,000*0.742

= 29,000 (adjusted for rounding error) + 12614

= $41,614

4. Lower of cost or market:

	Cost	Retail
Beginning inventory	29,000.00	45,000.00
Purchases	140,000.00	190,000.00
less: purchase discount taken	-3,000.00
less: purchase returns	-5,000.00	-8,000.00
Freight in	20,000.00
Net additional mark ups		40,000.00
Goods available for sale	181,000.00	267,000.00
less: net sales and employee discounts		-193,000.00
Net markdowns		-12,000.00
Ending inventory at retail		62,000.00
Ending inventory at LCM	42,036.00

Caluclations and explanations:

Cost to retail ratio = 181,000/267,000 = 0.678

Ending inventory at LCM (lower of cost or market) = 62,000*0.678 = $42,036