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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Retail Inventory Method Red Department Store uses the retail inventory method. Information relating to the computation of the inventory at Decen1ber 31, 2019, is as follows:

Chapter 8, Problem 8P, Retail Inventory Method Red Department Store uses the retail inventory method. Information relating

Estimated normal shrinkage is 2% of sales.

Required:

Prepare a schedule to calculate the estimated ending inventory at the lower of average cost or market at December 31, 2019, using the retail inventory method. Show supporting computations in good form. Round the cost-to-retail ratio to 3 decimal places.

To determine

Compute the estimated amount of ending inventory at lower or average cost or market using the retail inventory method.

Explanation

Retail inventory method: It takes into account all the retail amounts that is, the current selling prices. Under this method, the goods available for sale, at retail is deducted from the sales, at retail to determine the ending inventory, at retail.

Conventional Retail Method: Conventional retail method refers to the estimation of the lower of average cost or market by eliminating the markdowns from the calculation of the cost-to-retail percentage.

In this case, the cost-to-retail percentage will be determined by dividing the goods available for sale at cost by the goods available for at retail (excluding markdowns). Thus, the conventional retail method will always result in lower estimation of ending inventory when the markdowns exist.

Compute the estimated amount of ending inventory at lower or average cost or market using the retail inventory method.

R  Department Store
Computation of Estimated Inventory Using Retail Inventory Method
At December 31, 2019
DetailsCost ($)Retail ($)
Beginning inventory32,00080,000
Purchases270,000590,000
Freight -in7,6000
Net additional markups050,000
Goods available for sale before markdowns309,600720,000
Less: Net markdowns (20,000)
          Net sales (600,000)
          Normal shrinkage  (12,000)
Estimated ending inventory at retail $88,000
Estimated ending inventory at cost (LCM)$37,840 

Table (1)

Working note 1:

Calculate the amount of net additional markups.

Net additional markups = (Markups at retailMarkup cancellations)=($60,000$10,000)=$50,000

Working note 2:

Calculate the amount of net additional markdowns

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