Solutions Guide: Please reword the answers to essay type parts so as to guarantee that
your answer is an original. Do not submit as your own.
(a) Retail Inventory Method The Harmes Company is a clothing store that uses the retail
inventory method. The following information relates to its operations during 2010: Cost Retail
Inventory, January 1 $28,400 $40,200 Purchases 65,200 100,000 Markups (net) — 1,900
Markdowns (net) — 400 Sales — 80,000 Required: Compute the ending inventory by the retail
inventory method for the following cost flow assumptions: 1. FIFO 3. LIFO 2. Average cost 4.
Lower of cost or market (based on average cost)
1.
Cost
Purchases
Markups (net)
Markdowns (net)
$65,200
$65,200
Cost-to-retail ratio:
2.
Cost
Beginning inventory
Purchases
Markups (net)
Markdowns (net)
Goods available for sale
$28,400
65,200
$93,600
Cost
Beginning inventory
40,200
$141,700
(80,000)
$ 61,700
$39,611
Retail
$ 40,200
100,000
1,900
(400)
$141,700
$ 93,600
 0.661
$141,700
Less: Sales
Ending inventory at retail
Ending inventory at cost ($61,700 x 0.661)
3.
$100,000
1,900
(400)
$101,500
$ 65,200
 0.642
$101,500
Add: Beginning inventory
28,400
Goods available for sale
$93,600
Less: Sales
Ending inventory at retail
Ending inventory at cost ($61,700 x 0.642)
Cost-to-retail ratio:
Retail
$28,400
(80,000)
$ 61,700
$40,784
Retail
$ 40,200
Cost-to-retail ratio:
$ 28,400
 0.706
$ 40,200
Purchases
Markups (net)
Markdowns (net)
Cost-to-retail ratio:
65,200
100,000
1,900
(400)
$101,500
$ 65,200
 0.642
$101,500
Goods available for sale
$93,600
Less: Sales
Ending inventory at retail
Ending inventory at LIFO cost
[$40,200 x 0.706 (beginning layer)] $28,400*
[$21,500 x 0.642 (new layer)]
13,803
Total
$42,203
$141,700
(80,000)
$ 61,700
*Adjusted for rounding error to original cost.
4.
Cost
Beginning inventory
Purchases
Markups (net)
Retail
$28,400
65,200
$93,600
Cost-to-retail ratio:
$ 40,200
100,000
1,900
$142,100
$ 93,600
 0.659
$142,100
Less: Markdowns (net)
Sales
Ending inventory at retail
Ending inventory at LCM ($61,700 x 0.659)
(400)
(80,000)
$ 61,700
$40,660
(b) Dollar-Value LIFO Retail On December 31, 2009, Davison Company adopted the dollarvalue LIFO retail inventory method. Inventory data for 2010 are as follows: LIFO Cost Retail
Inventory, 12/31/09 $360,000 $500,000 Inventory, 12/31/10 ? 660,000 Increase in price level for
2010 10% Cost-to-retail ratio for 2010 70%
Ending inventory converted to base-year prices = $660,000 x
100
= $600,000
110
There is a $100,000 increase in retail inventory in base year prices
($600,000 - $500,000)
Ending inventory at retail consists of:
$500, 000 
100
 $500, 000
100
$100, 000 
110
 $110, 000
100
$610,000
Ending inventory at cost:
Beginning inventory = $360,000
$110,000 x 0.70
=
77,000
$437,000
(c) Lower of Cost or Market The Palmquist Company has five different inventory items that it
values by the lower of cost or market method. The normal markup on all items is 20% of cost.
The following information is obtained from the company’s records: Item Units Cost
Replacement Cost Net Realizable Value 1 500 $10.00 $ 9.10 $ 9.20 2 400 8.00 8.10 7.80 3 300
15.00 13.50 14.00 4 200 18.00 12.00 17.00 5 100 25.00 25.50 25.30 Required 1. Compute the
lower of cost or market value for each item. 2. Compute the total inventory value if the lower of
cost or market is applied to (a) each individual item and (b) the inventory as a whole. Explain the
reason for the difference between the two values. 3. Compute the lower of cost or market value
for each item if the Palmquist Company uses IFRS.
1.
Item
1
2
3
4
5
a
2.
Cost
$10.00
8.00
15.00
18.00
25.00
Replacement
$ 9.10a
8.10
13.50a
12.00
25.50
NRV
$ 9.20
7.80a
14.00
17.00
25.30a
NRV
Less Markup
$ 7.20
6.20
11.00
13.40a
20.30
Designated as market
a. If lower of cost or market is applied to individual items
Item
1
2
3
4
Units
500
400
300
200
Valuation
$ 9.10
7.80
13.50
13.40
Total
$ 4,550
3,120
4,050
2,680
Lower of
Cost or Market
$ 9.10
7.80
13.50
13.40
25.00
5
100
25.00
Total inventory valuation
2,500
$16,900
b. If lower of cost or market is applied to whole inventory
Item
1
2
3
4
5
Units
500
400
300
200
100
Total value
Cost
$ 5,000
3,200
4,500
3,600
2,500
$18,800
Market
$ 4,550
3,120
4,050
2,680
2,530
$16,930
Lower of cost or market on inventory as a whole $16,930
The difference of $30 between the two values is caused by item 5. When the items were
taken individually, the market values for items 1-4 were used whereas the cost of item 5
was used. Then, when the LCM was applied to the inventory as a whole the total market
value of all items was used. Thus, the difference of $30 is accounted for as follows: 100
units x ($25.00 cost - $25.30 market) = $30.
3.
Case
Cost
1
2
3
4
5
$10.00
$ 8.00
$15.00
$18.00
$25.00
Net
Lower
Realizable of Cost
Value
or Market
$ 9.20
$ 7.80
$14.00
$17.00
$25.30
$ 9.20
$ 7.80
$14.00
$17.00
$25.00
NRV
NRV
NRV
NRV
cost
(d) Retail Inventory Method The Weber Corporation uses the retail inventory method to
estimate its inventory balances. The following information is available on June 30: Cost
Retail Cost Retail Inventory, January 1 $25,000 $60,000 Markdowns — $7,000
Purchases 75,000 180,000 Additional markups — 3,000 Sales — 210,000 Markdown
cancellations — 2,000 Purchases returns 2,000 5,000 Markup cancellations — 1,000
Sales returns — 5,000 Required: 1. Compute the inventory on June 30 using the “normal”
retail inventory method (lower of average cost or market). 2. Independent of Requirement
1, assume that the June 30 inventory was $80,000 at retail and that the cost-to-retail ratio
is 50%. If the price level of the inventory has risen by 5% during the period, compute the
cost of the June 30 inventory under the dollar-value retail LIFO method, assuming that
the company adopted the method at the beginning of the year.
1.
Beginning inventory
Net purchases ($75,000 - $2,000;
$180,000 - $5,000)
Net markups ($3,000 - $1,000)
Cost
$ 25,000
Retail
$ 60,000
73,000
175,000
2,000
$237,000
$ 98,000
Cost-to-retail ratio:
$98,000
 0.414
$237,000
Less:
Net sales ($210,000 - $5,000)
Net markdowns ($7,000 - $2,000)
Ending inventory at retail
Ending inventory at cost ($27,000 x 0.414)
(205,000)
(5,000)
$ 27,000
$ 11,178
2.
Ending inventory at retail: $80,000
Ending inventory at retail in base-year prices: $80,000  1.05 = $76,190
Beginning inventory at retail in base-year prices: $60,000
Increase in inventory at retail in base-year prices: $16,190
Increase in inventory at retail in current-year prices: $16,190 x 1.05 = $17,000
Increase in inventory at cost in current-year prices: $17,000 x 0.50 = $8,500
Ending inventory at cost--base:
$25,000
--addition: 8,500
Ending inventory, total cost
$33,500