Problem 9‐4

Retail inventory method is used to estimate ending inventory and cost of goods sold

Cost Retail

Beginning inventory $  90,000 $180,000

Purchases 355,000 580,000

Freight‐in 9,000

Purchase returns 7,000 11,000

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Net markups 16,000

Net markdowns 12,000

Normal spoilage 3,000

Abnormal spoilage 4,800 8,000

Sales 540,000

Sales returns 10,000

Sales are recorded net of employee discounts of $4,000

Problem 9‐4 (continued)

Part 1:  Estimate the ending inventory and cost of goods sold using the retail inventory method and average cost

Cost RetailBeginning inventory $  90,000 $180,000Add:   Purchases 355,000 580,000

Freight‐in 9,000Deduct: Purchase returns (7,000) (11,000)Add: Net markups 16,000Deduct: Net markdowns (12,000)

Abnormal spoilage (4,800) (8,000)

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p g ( , ) ( , )Goods available for sale $422,200 $745,000Cost/Retail % = $422,200 ÷ $745,000 = 59.36%Deduct: Normal spoilage (3,000)

Net sales (540,000 – 10,000) (530,000)Employee discounts (4,000)

Ending Inventory at retail $208,000Ending inventory at cost (59.36% x $208,000) (123,469)Cost of goods sold $318,731

Problem 9‐4 (continued)

Part 2:  Estimate the ending inventory and cost of goods sold using the retail inventory method and conventional (average, LCM)

Cost RetailBeginning inventory $  90,000 $180,000Add:   Purchases 355,000 580,000

Freight‐in 9,000Deduct: Purchase returns (7,000) (11,000)Add: Net markups 16,000Deduct: Abnormal spoilage (4,800) (8,000)

$442,200 $757,000

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$ , $ ,Cost/Retail % = $422,200 ÷ $757,000 = 58.41%Deduct: Net markdowns (12,000)Goods Available for sale $442,200 $745,000                Deduct: Normal spoilage (3,000)

Net sales (540,000 – 10,000) (530,000)Employee discounts (4,000)

Ending Inventory at retail $208,000Ending inventory at cost (58.41% x $208,000) (121,493)Cost of goods sold $320,707