Question

Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2018 are as follows:

	Cost			Retail
Beginning inventory	$	80,000		$	170,000
Purchases		347,000			570,000
Freight-in		8,000
Purchase returns		6,000			10,000
Net markups					15,000
Net markdowns					11,000
Normal spoilage					2,000
Abnormal spoilage		3,705			7,000
Sales					530,000
Sales returns					9,000

The company records sales net of employee discounts. Discounts for 2018 totaled $3,000.

Required:
1. Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the average cost application.
2. Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the conventional application.

(For all requirements, round Cost-to-retail percentage to two decimal places and final answers to whole dollars.)

	Average Cost application
Estimated ending inventory at retail
Estimated ending inventory at co
Estimated cost of goods sold

Answer 1

Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the average cost application.

	Cost	Retail
Beginning inventory	$80000	$170000
Add: Purchases	347000	570000
Add: Freight-in	8000
Less:Purchase returns	(6000)	(10000)
Add: Net markups		15000
Less: Net markdowns		(11000)
Less: Abnormal spoilage	(3705)	(7000)
Goods Available for sales	$425295	$727000
Less: Normal spoilage		(2000)
Net Sales(530000 - 9000)		(521000)
Employee Discounts		(3000)
Ending Inventory at retail		$201000
Ending inventory at Cost	(117585)
Cost of goods sold	$307710

Cost retail % = 425295/727000 = 58.5%

Ending inventory at cost = (58.5% x $201000) = $117585

Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the conventional application

	Cost	Retail
Beginning inventory	$80000	$170000
Add: Purchases	347000	570000
Add: Freight-in	8000
Less:Purchase returns	(6000)	(10000)
Add: Net markups		15000
Less: Abnormal spoilage	(3705)	(7000)
Goods Available for sales	$425295	$738000
Less: Net Marks down		(11000)
Goods Available for sales	$425295	$727000
Less: Normal spoilage		(2000)
Net Sales(530000 - 9000)		(521000)
Employee Discounts		(3000)
Ending Inventory at retail		$201000
Ending inventory at Cost	(115816)
Cost of goods sold	$309479

Cost retail % = 425295/738000 = 57.62%

Ending inventory at cost = (57.62% x $201000) = $115816