20

RETAIL METHOD
Problem 20-1 (AICPA Adapted)

On December 31, 2010, the following information was available from Huff Company’s accounting
records:

Cost Retail
Inventory, January 1 735,000 1,015,000
Purchases 4,615,000 5,775,000
Additional for sale - 210,000_

Available for sale 4,900,000 7,000,000

Sales for the year totaled P5,530,000. Markdowns amounted to P70,000. Under the approximate
lower of average cost or market retail method, what is the inventory on December 31, 2010?

a. 1,540,000
b. 1,400,000
c. 1,078,000
d. 980,000

Solution 20-1 Answer d

Cost Retail
Available for sale 4,900,000 7,000,000
Markdowns (70,000)
Sales (5,530,000)

Inventory, December 31 1,400,000

Conservative cost ratio (4,900/7,000) 70%_____

Inventory, December 31 at cost 980,000

The approximate lower of average cost or market retail method is the same as the conservative or
conventional retail approach.
Problem 20-2 (AICPA Adapted)

Dean Company uses the retail method to estimate its inventory. Data relating to the inventory
computation on December 31, 2010 are as follows:

Cost Retail
Inventory, January 1 720,000 1,000,000
Purchases 4,080,000 6,300,000
Net markups 700,000
Sales 6,820,000
Estimated normal shoplifting losses 80,000
Net markdowns 500,000

Under the average cost retail method, what is the estimated inventory on December 31, 2010?

a. 408,000
b. 600,000
c. 360,000
d. 384,000

Solution 20-2 Answer d

Cost Retail
Inventory, January 1 720,000 1,000,000
Purchases 4,080,000 6,300,000
Net markups _______ 700,000__

Available for sale- conservative 4,800,000 8,000,000

Cost ratio (4,800,000/8,000,000) 60%
Net markdowns _______ (500,000)

Available for sale- average 4,800,000 7,500,000

Cost ratio (4,800,000/7,500,000) 64%

Sales (6,820,000)
Estimated shoplifting losses (80,000)__

Inventory, December 31 600,000

Conservative cost (600,000 x 60%) 360,000

Average cost (600,000 x 64%) 384,000

The requirement is the average cost approach.

Problem 20-3 (IAA)

Caramel Company uses the average retail inventory method. On December 31, 2010, the following
information relating to the inventory was gathered:

Cost Retail
Inventory, January 1 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase discounts 40,000
Freight in 150,000
Markups 300,000
Markdowns 400,000
Sales 4,400,000
Sales return 100,000
Sales discount 50,000
Sales allowance 30,000

What is the estimated cost of the inventory on December 31, 2010?

a. 400,000
b. 280,000
c. 245,000
d. 315,000

Solution 20-3 Answer b

Cost Retail
Inventory- January 1 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase discounts (40,000)
Freight in 150,000
Markups 300,000
Markdowns ________ (400,000)

GAS- Average (cost ratio – 70%) 3,290,000 4,700,000

Net sales (4,400,000 – 100,000) (4,300,000)

Ending inventory at retail 400,000

Average cost (400,000 x 70%) 280,000

Note that the sales discount and sales allowance are ignored in determining the net sales under the
retail method.
Problem 20-4 (PHILCPA Adapted)

Diane Company’s inventory records showed the following information on December 31, 2010:

Cost Retail
Inventory, January 1 560,000 1,400,000
Sales 10,000,000
Purchases 4,960,000 10,320,000
Freight in 150,000
Markup 1,000,000
Markup cancelation 120,000
Markdown 500,000
Markdown cancelation 100,000
Estimated normal shrinkage is 2.5% of sales

Diane uses the average cost retail inventory method in estimating the value of its inventory. What is
the estimated cost of inventory on December 31, 2010?

a. 460,000
b. 877,500
c. 990,000
d. 897,000

Solution 20-4 Answer d

Cost Retail
Inventory, January 1 560,000 1,400,000
Purchases 4,960,000 10,320,000
Freight in 150,000
Markup 1,000,000
Markup cancelation ________ (120,000)

Available for sale- conservative 5,670,000 12,600,000

Cost ratio (5,670/12,600) 45%

Markdown (500,000)
Markdown cancelation ________ 100,000

Available for sale- average 5,670,000 12,200,000

Cost ratio (5,670/12,200) 46%

Sales (10,000,000)
Shrinkage (10,000,000 x 2.5%) (250,000)__

Inventory, December 31 1,950,000

Conservative cost (1,950,000 x 45%) 877,500

Average cost (1,950,000 x 46%) 897,000

Problem 20-5 (AICPA Adapted)

Hutch Company uses the average cost retail inventory method to account for inventory. The following
information relates to operations for the current year:

Cost Retail
Beginning inventory and purchases 6,000,000 9,200,000
Net markups 400,000
Net markdowns 600,000
Sales 7,800,000

What amount should be reported as cost of sales for the current year?

a. 4,800,000
b. 4,875,000
c. 5,200,000
d. 5,250,000

Solution 20-5 Answer c

Cost Retail
Beginning inventory and purchases 6,000,000 9,200,000
Net markups 400,000
Net markdowns (600,000)

Goods available for sale 6,000,000 9,000,000

Cost ratio (6,000/9,000) 66 2/3%

Sales (7,800,000)

Ending inventory 1,200,000

Average cost (1,200,000 x 66 2/3%) 800,000

Goods available for sale 6,000,000

Ending inventory (800,000)

Cost of sales 5,200,000

Problem 20-6 (PHILCPA Adapted)

On January 1, 2010, the stock inventory of Ron Company was P1,000,000 at retail and P560,000 at cost.
During the current year, the entity registered the following purchases:

Cost 4,000,000
Retail price 6,200,000
Original markup 2,200,000

The total net sales was P5,400,000. The following reductions were made in the retail price:

To meet price competition 50,000

To dispose of overstock 30,000
Miscellaneous reductions 120,000

During the current year, the selling price of a certain inventory increase from P200 to P300. This
additional markups applied to 5,000 items but was later cancelled on the remaining 1,000 items. What
is the inventory on December 31, 2010 using the average cost retail method?

a. 2,000,000
b. 2,400,000
c. 1,240,000
d. 1,200,000

Solution 20-6 Answer c

Cost Retail
Inventory – January 1 560,000 1,000,000
Purchases 4,000,000 6,200,000
Markup (5,000 x P100) 500,000
Markup cancelation (1,000 x P100) (100,000)

Goods available - 60% 4,560,000 7,600,000

Markdowns (reduction in retail price) (200,000)

Goods available – average 62% 4,560,000 7,400,000

Net sales (5,400,000)

Inventory – December 31 2,000,000

Conservative cost (60% x 2,000,000) 1,200,000

Average cost (62% x 2,000,000) 1,240,000

Problem 20-7 (IAA)

Airborne Company uses the average cost retail inventory method. The following information is available
for the year ended December 31, 2010.

Cost Retail
Inventory – January 1 1,650,000 2,200,000
Net purchases 3,725,000 4,950,000
Departmental transfer – credit 200,000 300,000
Net markup 150,000
Inventory shortage – sales price 100,000
Employee discounts 200,000
Sales (including sales of P400,000 of items which
were marked down from P500,000) 4,000,000

What is the estimated cost of inventory on December 31, 2010?

a. 1,950,000
b. 2,600,000
c. 1,924,000
d. 2,250,000

Solution 20-7 Answer a

Cost Retail
Inventory – January 1 1,650,000 2,200,000
Net purchases 3,725,000 4,950,000
Departmental transfer – credit (200,000) (300,000)
Net markup 150,000
Markdown (500,000 – 400,000) (100,000)

Goods available for sale (75%) 5,175,000 6,900,000

Sales (4,000,000)
Inventory shortage – sales price (100,000)
Employee discounts (200,000)

Inventory, December 31 2,600,000

Average cost (2,600,000 x 75%) 1,950,000

Problem 20-8 (AICPA Adapted)

Union Company uses the FIFO retail method of inventory valuation. The following information is
available:

Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net additional markups 500,000
Net markdowns 1,000,000
Sales revenue 4,500,000

What is the estimated cost if ending inventory?

a. 1,200,000
b. 1,040,000
c. 1,000,000
d. 960,000

Solution 20-8 Answer a

Cost Retail
Beginning inventory 600,000 1,500,000

Purchases 3,000,000 5,500,000

Net markups 500,000
Net markdowns (1,000,000)

Net purchases 3,000,000 5,000,000

Cost ratio (3,000,000/5,000,000) 60%
Goods available for sale 3,600,000 6,500,000

Sales (4,500,000)

Ending inventory 2,000,000

FIFO cost (2,000,000 x 60%) 1,200,000

Problem 20-9 (IAA)

Groom Company uses the LIFO retail method of inventory valuation. The following information is
available for the current year:

Cost Retail
Inventory, January 1 1,200,000 1,500,000
Net purchases 4,200,000 5,900,000
Net markups 200,000
Net markdowns 100,000
Net sales 5,500,000

What is the estimated cost of ending inventory?

a. 1,400,000
b. 1,550,000
c. 1,440,000
d. 1,460,000

Solution 20-9 Answer b

Cost Retail
Inventory, January 1 80% 1,200,000 1,500,000

Purchases 4,200,000 5,900,000

Net markups 200,000
Net markdowns (100,000)

Net purchases (4,200/6,000) 70% 4,200,000 6,000,000

Goods available for sale 5,400,000 7,500,000

Sales (5,500,000)

FIFO inventory – 12/31 (2,000,000 x 70%) 1,400,000 2,000,000

Inventory – January 1 1,200,000 1,500,000

Increase (70% x 500,000) 350,000 500,000

LIFO inventory – 12/31 1,550,000 2,000,000