PFA 1
Chapter 33 – Retail Method
Nadin Olga D. Semira
Rachell V. Undecimo
Diana Rose M. Vico
Problem 33-1 (AICPA Adopted)
Janelle Company used the retail inventory method to approximate the ending inventory.
Beginning Inventory
Purchases
Freight-in
Purchase Returns
Purchase Allowances
Departmental transfer in
Markup
Markup Cancelation
Markdown
Markdown Cancelation
Sales
Sales Discounts
Employee Discounts
Estimated Normal Shoplifting Loss
Estimated Normal Shrinkage
Cost
650,000
9,000,000
200,000
300,000
150,000
200,000
Retail
1,200,000
14,700,000
500,000
300,000
400,000
100,000
1,200,000
200,000
9,500,000
100,000
500,000
600,000
400,000
1. What is the estimated cost of ending inventory using the conservative approach?
a. 2,400,000
b. 2,460,000
c. 3,060,000
d. 2,700,000
2. What is the estimated cost of ending inventory using the average cost approach?
a. 2,560,000
b. 2,624,000
c. 3,264,000
d. 2,880,000
Solution 33-1
Question 1 Answer a
Beginning Inventory
Purchases
Freight-in
Purchase Returns
Purchase allowances
Department transfer in
Markup
Markup cancelation
Goods Available-Conservative
Markdown
Markdown Cancelation
Goods Available-Average
Sales
Employee discounts
Normal Shoplifting loss
Normal Shrinkage
Ending Inventory at Retail
Cost
650,000
9,000,000
200,000
(300,000)
(150,000)
200,000
9,600,000
9,600,000
Retail
1,200,000
14,700,000
(500,000)
300,000
400,000
(100,000)
16,000,000
(1,200,000)
200,000
15,000,000
(9,500,000)
(500,000)
(600,000)
(400,000)
4,000,000
Conservative Cost Ratio (9,600,000/16,000,000)
Conservative Cost (60%x4,000,000)
60%
2,400,000
Question 2 Answer a
Average Cost Ratio (9,600,000/15,000,000)
Average Cost (64%x4,000,000)
64%
2,560,000
Note that ending inventory at retail of P4, 000, 000 is the same whether conservative or average
cost approach.
In the absence of any statement to the contrary, the average cost approach should be followed.
Problem 33-2 (AICPA Adopted)
At year end, Huff Company provided the following information:
Beginning Inventory
Purchases
Additional Markups
Available for Sale
Cost
735,000
4,165,000
4,900,000
Retail
1,015,000
5,775,000
210,000
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 ending
inventory?
a.
b.
c.
d.
1,540,000
1,400,000
1,078,000
980,000
Solution 33-2 Answer D
Available for Sale
Markdowns
Sales
Ending Inventory
Conservative Cost Ratio (4,900,000/7,000,000)
Ending Inventory at cost
Cost
4,900,000
Retail
7,000,000
(70,000)
(5,530,000)
1,400,000
70%
980,000
The approximate lower of average cost or market retail method is the same as the conservative
or conventional retail approach.
Problem 33-3 (AICPA Adopted)
Dean Company used the retail inventory method to estimate inventory at year-end.
Beginning Inventory
Purchases
Net Markups
Net Markdowns
Sales
Estimated Normal Shoplifting Losses
Cost
720,000
4,080,000
Retail
1,000,000
6,300,000
700,000
500,000
6,820,000
80,000
Under the average cost retailed method, what is the estimated cost of ending inventory?
a.
b.
c.
d.
408,000
600,000
360,000
384,000
Solution 33-3 Answer D
Beginning Inventory
Purchases
Net Markups
Available for Sale- Conservative
Cost ratio (4,800,000/8,000,000)
Net markdowns
Available for Sale-Average
Cost ratio (4,800,000/7,500,000)
Sales
Estimated shoplifting losses
Ending Inventory at retail
Conservative Cost (600,000 x 60%)
Average Cost (600,000 x 64%)
Cost
720,000
4,080,000
4,800,000
Retail
1,000,000
6,300,000
700,000
8,000,000
4,800,000
(500,000)
7,500,000
60%
The requirement is the average cost approach.
(6,820,000)
(80,000)
600,000
360,000
384,000
Problem 33-4 (IAA)
Caramel Company used the average retail inventory method. At year-end, the following
information relating to the inventory was gathered.
Beginning Inventory
Purchases
Purchase Discounts
Freight in
Markups
Markdowns
Sales
Sales Return
Sales discount
Sales Allowance
Cost
190,000
2,990,000
40,000
150,000
Retail
450,000
4,350,000
300,000
400,000
4,400,000
100,000
50,000
30,000
What is the estimated cost of the ending inventory?
a.
b.
c.
d.
400,000
280,000
245,000
315,000
Solution 33-4 Answer B
Beginning Inventory
Purchases
Purchase Discounts
Freight in
Markups
Markdowns
GAS-Average (cost ratio- 70%)
Net sales (4,400,000-100,000)
Ending inventory at retail
Average cost (400,000 x 70%)
Cost
190,000
2,990,000
(40,000)
150,000
3,290,000
Retail
450,000
4,350,000
300,000
(400,000)
4,700,000
(4,300,000)
400,000
280,000
Note that the sales discount and sales allowance are ignored in determining the net sales under
the retail method.
Problem 33-5 (AICPA Adopted)
Hutch Company used the average cost retail inventory method to account for inventory. The
following informationrelated to operations fo the current year:
Beginning invetory and purchases
Net markups
Net markdowns
Sales
Cost
6,000,000
Retail
9,2000,000
400,000
600,000
7,800,000
What amount should be reported as cost of goods sold for the current year?
a.
b.
c.
d.
4,800,000
4,875,000
5,200,000
5,250,000
Solution 33-5 Answer C
Beginning invetory and purchases
Net markups
Net markdowns
Goods available for Sales
Cost Ratio (6,000/9,000)
66 2/3%
Sales
Ending inventory
Average cost (1,200,000 x 66 2/3%)
Goods available for sale
Ending inventory
Cost of goods sold
Cost
6,000,000
6,000,000
Retail
9,2000,000
400,000
(600,000)
9,000,000
(7,800,000)
1,200,000
800,000
6,000,000
(800,000)
5,200,000
Problem 33-6 (IAA)
Domicile Company had the following amounts all at retail:
Beginning inventory
Purchases
Purchase return
Net markup
Net markdown
Sales
Sales return
Employee discounts
Normal shortage
Abnormal shortage
180,000
6,000,000
300,000
900,000
140,000
3,600,000
90,000
80,000
130,000
200,000
What is the ending inventory at retail?
a.
b.
c.
d.
2,700,000
2,800,000
2,880,000
2,920,000
Solution 33-6 Answer A
Beginning inventory
Purchases
Purchase return
Net markup
Net markdown
Abnormal shortage
Goods available for sale at retail
Less: Sales
Sales return
Employee discounts
Normal shortage
Ending inventory at retail
180,000
6,000,000
(300,000)
900,000
(140,000)
(200,000)
6,440,000
3,600,000
(90,000)
80,000
130,000
3,720,000
2,720,000
Problem 33-7 (PHILCPA Adopted)
At the beginning of current year, the 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
Retail price
Original markup
4,000,000
6,200,000
2,200,000
The amount of net sales was P5,400,000. The following reductions were made in the reatil price:
To meet price competition
To dispose of overstock
Miscellaneous reductions
50,000
30,000
120,000
During the current year, the selling price of the certain inventory increased from P200 to P300.
This additional markup applied to 5,000 items but was later canceled on the remaining 1,000
items.
What is the estimated cost of ending invetory using the average cost retail metod?
a.
b.
c.
d.
2,000,000
2,400,000
1,240,000
1,200,000
Solutions 33-7 Answer C
Beginning inventory
Purchases
Markup (5,000xP100)
Markup cancelation (1,000 x P100)
Goods available-conservation 60%
Markdowns (reduction in retail price)
Goods available-average 62%
Net sales
Ending invetory at retail
Conservative cost (60% x 2,000,000)
Average cost (62% x 2,000,000)
Cost
560,000
4,000,000
4,560,000
4,560,000
1,200,000
1,240,000
Retail
1,000,000
6,200,000
500,000
(100,000)
7,600,000
(200,000)
7,400,000
(5,400,000)
2,000,000
Problem 33-8 (IAA)
Airborne company used the average cost retail inventory method. The entity provided the
following information for the current year.
Beginning Inventory
Net purchase
Departmental transfer – credit
Net markup
Inventory shortage – sales price
Employee discounts
Sales, including sales of P400,000 of items which
were marked down from P500,000
Cost
1,650,000
3,725,000
200,000
Retail
2,200,000
4,950,000
300,000
150,000
100,000
200,000
4,000,000
What is the estimated cost of ending inventory?
a. 1,950,000
b. 2,600,000
c. 1,924,000
b. 2,250,000
Solution 33-8 Answer A
Beginning Inventory
Net purchase
Departmental transfer – credit
Net markup
Markdown (5000,000 – 400,000)
Goods available for sale (75%)
Sales
Inventory shortage – sales price
Employee discounts
Ending inventory at retail
Average cost (2,600,000 x 75%)
Cost
1,650,000
3,725,000
(*200,000)
5,175,000
Retail
2,200,000
4,950,000
(300,000)
150,000
(100,000)
6,900,000
(4,000,000)
(100,000)
(200,000)
2,600,000
1,950,000
Problem 33-9 (AICPA Adapted)
Bizarre Company had always inventoried finished goods at selling price and prepared the
following statement on this basis
Sales
Raw materials used at cost
Labor
Overhead
Total
Work in process at cost:
January 1
December 31
Cost of goods manufactured
Finished good at selling price:
January 1
December 31
Gross Income
1,400,000
500,000
600,000
240,000
1,340,000
612,000
752,000
240,000
840,000
140,000
1,200,000
600,000
600,000
800,000
What is the cost of goods sold?
a. 500,000
b. 200,000
c. 840,000
b. 600,000
Solution 33-9 Answer C
Finished goods – January 1 (60% x 240,000)
Cost of goods manufactured (squeeze)
Goods available for sale
Finished goods – December 31(60% x 840,000)
Cost of goods sold
Cost
140,000
1,200,000
1,344,000
(540,000)
840,000
The amount of goods manufactured at retail is determined by simply working back.
Cost ratio
=
=
=
Goods manufactured at cost
Goodsmanufactured at retail
1,200,000/2,000,000
60%
Retail
240,000
2,000,000
2,240,000
(840,000)
1,400,000
Problem 33-10 (AICPA Adapted)
Union company used the FIFO retail method of inventory valuation. The entity provided the
following information for the current year.
Beginning Inventory
Purchases
Net markups
Net markdowns
Employee discounts
Sales, revenue
Cost
600,000
3,000,000
Retail
1,500,000
5,500,000
500,000
1,000,000
200,000
4,500,000
What is the estimated cost of ending inventory?
a. 1,200,000
b. 1,040,000
c. 1,000,000
b. 960,000
Solution 33-10 Answer A
Beginning Inventory
Purchases
Net markups
Net markdown
Net purchases
Cost ratio (3,000,000/5,000,000)
Goods available for sale
Sales
Ending inventory at retail
FIFO cost (2,600,000 x 65%)
Cost
600,000
3,000,000
Retail
1,500,000
5,000,000
500,000
1,000,000
300,000
60%
3,600,000
5,000,000
1,200,000
6,500,000
(4,500,000)
2,000,000
Problem 33-11 (IAA)
Ross Company provided the following data for the current year.
Beginning Inventory
Net purchase
Net markup
Net markdown
Net sales
Cost
1,650,000
4,200,000
Retail
2,000,000
?
800,000
200,000
?
The entity used the average retail inventory method to estimate ending inventory. It was
determined that the average cost of the ending inventory was P1,950,000. If the entity used the
FIFO retail method, the cost ratio would have been 60%.
1. What is the amount of the net purchases at original retail before markup and markdown?
a.
b.
c.
d.
7,600,000
7,000,000
4,200,000
6,400,000
2. What amount was reported as net sales
a.
b.
c.
d.
9,000,000
3,000,000
6,000,000
7,000,000
3. What amount was reported as cost of goods sold?
a.
b.
c.
d.
3,900,000
3,000,000
3,600,000
1,800,000
Solution 33-11
Under the FIFO retail, the cost ratio is determined by considering the current purchases only
excluding beginning inventory but including markup and markdown.
Question 1 Answer D
Net Purchases (SQUEEZE)
4,200,000
Net markup
800,000
Net markdown
Net purchase after markup and markdown
6,400,000
(200,000)
4,200,000
Net purchases at cost
7,000,000
4,200,000
Divided by FIFO cost ratio
60%
Net purchases after markup and markdown
7,000,000
Question 2 Answer C
Beginning inventory
1,650,000
2,000,000
Net purchases
4,200,000
6,400,000
Net markup
800,000
Net markdown
Goods available for sale
Average cost ratio (5,850,000/9,000,000)
Ending inventory at cost
Divide by average cost ratio
(200,000)
5,850,000
9,000,000
65%
1,950,000
65%
Ending inventory at retail
3,000,000
Goods available for sale at retail
9,000,000
Ending inventory at retail
(3,000,000)
Net Sales
6,000,000
Question 3 Answer A
Goods available for sale at cost
Ending inventory at cost
Cost of goods sold
5,850,000
(1,950,000)
3,900,000