Question

Raleigh Department Store uses the conventional retail method for the year ended December 31, 2016. Available information follows: The inventory at January 1, 2016, had a retail value of $51,000 and a cost of $38,060 based on the conventional retail method. Transactions during 2016 were as follows: Cost Retail Gross purchases $ 344,940 $ 550,000 Purchase returns 6,500 16,000 Purchase discounts 5,600 Gross sales 544,000 Sales returns 5,000 Employee discounts 6,000 Freight-in 29,500 Net markups 31,000 Net markdowns 16,000 Sales to employees are recorded net of discounts. The retail value of the December 31, 2017, inventory was $60,180, the cost-to-retail percentage for 2017 under the LIFO retail method was 75%, and the appropriate price index was 102% of the January 1, 2017, price level. The retail value of the December 31, 2018, inventory was $51,450, the cost-to-retail percentage for 2018 under the LIFO retail method was 74%, and the appropriate price index was 105% of the January 1, 2017, price level.

Required:

1. Estimate ending inventory for 2016 using the conventional retail method.

2. Estimate ending inventory for 2016 assuming Raleigh Department Store used the LIFO retail method.

3. Assume Raleigh Department Store adopts the dollar-value LIFO retail method on January 1, 2017. Estimating ending inventory for 2017 and 2018.

Answer 1

Part 1)

The value of ending inventory with the use of conventional retail method is arrived as below:

	Cost	Retail	Cost-to-Retail Ratio
Beginning Inventory	38,060	51,000
Add Purchases	344,940	550,000
Freight In	29,500
Less Purchase Returns	-6,500	-16,000
Purchase Discounts	-5,600
Add Net Markups		31,000
		616,000
Cost to Retail Percentage (400,400/616,000*100)			65%
Less Net Markdowns		-16,000
Goods Available for Sale	400,400	600,000
Less Net Sales (544,000 - 5,000)		-539,000
Employee Discounts		-6,000
Estimated Ending Inventory at Retail		55,000
Estimated Ending Inventory at Cost (55,000*65%)	$35,750

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Part 2)

The value of estimated ending inventory for 2016 assuming Raleigh Department Store used the LIFO retail method is calculated as below:

	Cost	Retail	Cost-to-Retail Ratio
Beginning Inventory	38,060	51,000
Add Purchases	344,940	550,000
Freight In	29,500
Less Purchase Returns	-6,500	-16,000
Purchase Discounts	-5,600
Add Net Markups		31,000
Less Net Markdowns		-16,000
Goods Available for Sale (Excluding Beginning Inventory)	362,340	549,000
Goods Available for Sale (Including Beginning Inventory)	400,400	600,000
Cost to Retail Percentage (362,349/549,000*100)			66%
Less Net Sales (544,000 - 5,000)		-539,000
Employee Discounts		-6,000
Estimated Ending Inventory at Retail		55,000
Estimated Ending Inventory at Cost	$40,700

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Notes:

The value of ending inventory for is determined as below:

Estimated Ending Inventory at Cost:
	Retail	Cost
Beginning Inventory	51,000	38,060
Current Period's Layer	4,000 (55,000 - 51,000)	2,640 (4,000*66%)
Total	$55,000	$40,700

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Part 3)

The value of estimated ending inventory for 2017 and 2018 is calculated as follows:

2017:

Ending Inventory at Base Year Retail Prices	Inventory Layers at Base Year Prices	Inventory Layers Converted to Cost
59,000 (60,180/1.02)	55,000	40,700 (55,000*1*40,700/55,000)
	4,000 (59,000 - 55,000)	3,060 (4,000*1.02*75%)
Total Ending Inventory at Dollar-Value LIFO Retail Cost		$43,760

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2018:

Ending Inventory at Base Year Retail Prices	Inventory Layers at Base Year Prices	Inventory Layers Converted to Cost
49,000 (51,450/1.05)	49,000	36,260 (49,000*1*74%)
Total Ending Inventory at Dollar-Value LIFO Retail Cost		$36,260