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Chapter 33 - Retail Method: Problem 33-1 (AICPA Adopted)
Chapter 33 - Retail Method: Problem 33-1 (AICPA Adopted)
Janelle Company used the retail inventory method to approximate the ending inventory.
Cost Retail
Beginning Inventory 650,000 1,200,000
Purchases 9,000,000 14,700,000
Freight-in 200,000
Purchase Returns 300,000 500,000
Purchase Allowances 150,000
Departmental transfer in 200,000 300,000
Markup 400,000
Markup Cancelation 100,000
Markdown 1,200,000
Markdown Cancelation 200,000
Sales 9,500,000
Sales Discounts 100,000
Employee Discounts 500,000
Estimated Normal Shoplifting Loss 600,000
Estimated Normal Shrinkage 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
Cost Retail
Beginning Inventory 650,000 1,200,000
Purchases 9,000,000 14,700,000
Freight-in 200,000
Purchase Returns (300,000) (500,000)
Purchase allowances (150,000)
Department transfer in 200,000 300,000
Markup 400,000
Markup cancelation (100,000)
Goods Available-Conservative 9,600,000 16,000,000
Markdown (1,200,000)
Markdown Cancelation 200,000
Goods Available-Average 9,600,000 15,000,000
Sales (9,500,000)
Employee discounts (500,000)
Normal Shoplifting loss (600,000)
Normal Shrinkage (400,000)
Ending Inventory at Retail 4,000,000
Question 2 Answer a
Average Cost Ratio (9,600,000/15,000,000) 64%
Average Cost (64%x4,000,000) 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.
Cost Retail
Available for Sale 4,900,000 7,000,000
Markdowns (70,000)
Sales (5,530,000)
Ending Inventory 1,400,000
Conservative Cost Ratio (4,900,000/7,000,000) 70%
Ending Inventory at cost 980,000
The approximate lower of average cost or market retail method is the same as the conservative
or conventional retail approach.
Dean Company used the retail inventory method to estimate inventory at year-end.
Cost Retail
Beginning Inventory 720,000 1,000,000
Purchases 4,080,000 6,300,000
Net Markups 700,000
Net Markdowns 500,000
Sales 6,820,000
Estimated Normal Shoplifting Losses 80,000
Under the average cost retailed method, what is the estimated cost of ending inventory?
a. 408,000
b. 600,000
c. 360,000
d. 384,000
Cost Retail
Beginning Inventory 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)
Sales (6,820,000)
Estimated shoplifting losses (80,000)
Ending Inventory at retail 600,000
Conservative Cost (600,000 x 60%) 360,000
Average Cost (600,000 x 64%) 384,000
Cost Retail
Beginning Inventory 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
a. 400,000
b. 280,000
c. 245,000
d. 315,000
Cost Retail
Beginning Inventory 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 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:
Cost Retail
Beginning invetory and purchases 6,000,000 9,2000,000
Net markups 400,000
Net markdowns 600,000
Sales 7,800,000
What amount should be reported as cost of goods sold for the current year?
a. 4,800,000
b. 4,875,000
c. 5,200,000
d. 5,250,000
Cost Retail
Beginning invetory and purchases 6,000,000 9,2000,000
Net markups 400,000
Net markdowns (600,000)
Goods available for Sales 6,000,000 9,000,000
a. 2,700,000
b. 2,800,000
c. 2,880,000
d. 2,920,000
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 4,000,000
Retail price 6,200,000
Original markup 2,200,000
The amount of net sales was P5,400,000. The following reductions were made in the reatil price:
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. 2,000,000
b. 2,400,000
c. 1,240,000
d. 1,200,000
Cost Retail
Beginning inventory 560,000 1,000,000
Purchases 4,000,000 6,200,000
Markup (5,000xP100) 500,000
Markup cancelation (1,000 x P100) (100,000)
Goods available-conservation 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)
Ending invetory at retail 2,000,000
Conservative cost (60% x 2,000,000) 1,200,000
Average cost (62% x 2,000,000) 1,240,000
Problem 33-8 (IAA)
Airborne company used the average cost retail inventory method. The entity provided the
following information for the current year.
Cost Retail
Beginning Inventory 1,650,000 2,200,000
Net purchase 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 4,000,000
were marked down from P500,000
a. 1,950,000
b. 2,600,000
c. 1,924,000
b. 2,250,000
Cost Retail
Beginning Inventory 1,650,000 2,200,000
Net purchase 3,725,000 4,950,000
Departmental transfer – credit (*200,000) (300,000)
Net markup 150,000
Markdown (5000,000 – 400,000) (100,000)
Goods available for sale (75%) 5,175,000 6,900,000
Sales (4,000,000)
Bizarre Company had always inventoried finished goods at selling price and prepared the
following statement on this basis
Sales 1,400,000
Raw materials used at cost 500,000
Labor 600,000
Overhead 240,000
Total 1,340,000
Work in process at cost:
January 1 612,000
December 31 752,000 140,000
Cost of goods manufactured 1,200,000
Finished good at selling price:
January 1 240,000
December 31 840,000 600,000 600,000
Gross Income 800,000
a. 500,000
b. 200,000
c. 840,000
b. 600,000
= 1,200,000/2,000,000
= 60%
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.
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
Employee discounts 200,000
Sales, revenue 4,500,000
a. 1,200,000
b. 1,040,000
c. 1,000,000
b. 960,000
Cost Retail
Beginning Inventory 600,000 1,500,000
Purchases 3,000,000 5,000,000
Net markups 500,000
Net markdown 1,000,000
Ross Company provided the following data for the current year.
Cost Retail
Beginning Inventory 1,650,000 2,000,000
Net purchase 4,200,000 ?
Net markup 800,000
Net markdown 200,000
Net sales ?
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. 7,600,000
b. 7,000,000
c. 4,200,000
d. 6,400,000
a. 9,000,000
b. 3,000,000
c. 6,000,000
d. 7,000,000
a. 3,900,000
b. 3,000,000
c. 3,600,000
d. 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 6,400,000
Net markup 800,000
Net markdown (200,000)
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 (200,000)
Question 3 Answer A
Goods available for sale at cost 5,850,000
Ending inventory at cost (1,950,000)