PROBLEMS_INVENTORY ESTIMATION : RETAIL INVENTORY METHOD

1. Grenada Company showed the following information at year ended.

Cost Retail
Beginning inventory 280,000 700,000
Sales 5,000,000
Purchases 2,480,000 5,160,000
Freight in 75,000
Markup 500,000
Markup cancelation 60,000
Markdown 250,000
Markdown cancelation 50,000
Estimated normal shrinkage is 2% of sales.

The entity used the conservative retail inventory method in estimating the value of inventory.
What is the estimated cost of ending inventory?

Cost Retail
Beg inventory 280,000 700,000
Purchases 2,480,000 5,160,000
Freight in 75,000
MU 500,000
MU cancellation (60,000)
CGAFS – conservative 2,835,000 6,300,000 45 %
MD (250,000)
MD cancellation 50,000
CGAFS – average 2,835,000 6,100,000
===================
Sales 5,000,000
Normal shrinkage 100,000 (5,100,000)
End inventory-retail 1,000,000
X cost ratio 45 %
End inventory-cost 450,000

Conservative approach is also known as the lower of average cost or market retail.

2. Guadeloupe Company used the retail inventory method to estimate inventory for interim
statement purposes. The entity provided the following information for the current year:
 Cost Retail
Beginning inventory 700,000 1,000,000
Purchases 4,100,000 6,300,000
Markup 700,000
Markdown 500,000
Sales 5,900,000
Normal shoplifting losses 100,000

Under the average cost approach, what is the estimated cost of ending inventory?

Cost Retail
Beg inventory 720,000 1,000,000
Purchases 4,080,000 6,300,000
MU 700,000
MD (500,000)
CGAFS – average 4,800,000 7,500,000 64 %
=================
=
Sales 5,900,000
Normal losses 100,000 6,000,000
End inventory-retail 1,500,000
X cost ratio 64 %
End inventory-cost 960,000

3. Haiti Company used the conventional retail inventory method to account for inventory
Cost Retail
Beginning inventory and purchases 6,000,000 9,200,000
Net markup 400,000
Net markdown 600,000
Sales 7,800,000

What amount should be reported as cost of goods sold?

Cost Retail
Beg invty + Purchases 6,000,000 9,200,000
Net MU 400,000
CGAFS - conservative 6,000,000 9,600,000 62.5 %
Net MD (600,000)
CGAFS - average 6,000,000 9,000,000
 =================
=
Sales 7,800,000
End inventory-retail 1,200,000
X cost ratio 62.5 %
End inventory-cost 750,000

CGAFS 6,000,000
-Ending inventory-cost 750,000
COGS 5,250,000

4. At the beginning of current year Jamaica Company reported inventory of 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 net sales totaled P5,400,000. The following reduction 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 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 ending inventory using the average cost approach in applying the retail method?

Cost Retail
Beg inventory 560,000 1,000,000
Purchases 4,000,000 6,200,000
MU (300-200) x 500,000
5,000
MUC (300-200)x1000 (100,000)
MD 50T+30T+120T (200,000)
CGAFS 4,560,000 7,400,000 62 %
=================
Sales 5,400,000
End inventory 2,000,000
X cost ratio 62 %
End invty at cost 1,240,000

5. Martinique Company provided the following information for the current year:
Cost Retail
Beginning inventory 750,000 1,000,000
Purchases 4,150,000 5,800,000
Additional markup 200,000

Sales for the year totaled P5,500,000. Markdown amounted to P100,000. Under the average
cost approach in applying the retail method, what is the estimated cost of inventory?

Cost Retail
Beginning inventory 750,000 1,000,000
Purchases 4,150,000 5,800,000
MU 200,000
MD (100,000)
CGAFS 4,900,000 6,900,000 71 %
=================
=
Sales 5,500,000
End invty at retail 1,400,000
X cost ratio 71 %
End invty at cost 994,000

6. Montserrat Company used the average cost retail inventory method.

Cost Retail
Beginning inventory 1,650,000 2,200,000
Purchases 3,725,000 4,950,000
Department transfer -credit 200,000 300,000
Net markup 150,000
Inventory shortage – sales price 100,000
Employee discount 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 ending inventory?
Cost Retail
Beg inventory 1,650,000 2,200,000
Net purchases 3,725,000 4,950,000
Dept transfer-credit (200,000) (300,000)
Net MU 150,000
MD (500T – 400 T) (100,000)
CGAFS 5,175,000 6,900,000 75 %
=================
=
Sales 4,000,000
Inventory shortage 100,000
Employee discounts 200,000 4,300,000
End invty at retail 2,600,000
X cost ratio 75 %
End invty at cost 1,950,000

7. Puerto Rico Company used the retail inventory method to approximate the ending inventory.

The following information is available for the current year.

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
Net markup 300,000
Net markdown 1,000,000
Sales 9,500,000
Sales discounts 100,000
Employee discounts 500,000
Estimated normal shoplifting losses 600,000
Estimated normal shrinkage 400,000

7-1 What is the estimated cost of ending inventory using the conservative approach?
Cost Retail
Beg invty 650,000 1,200,000
Purchases 9,000,000 14,700,000
Freight in 200,000
PR (300,000) (500,000)
PA (150,000)
DT in 200,000 300,000
Net MU 300,000
CGAFS – conservative 9,600,000 16,000,000 60 %
Net MD (1,000,000)
CGAFS – average 9,600,000 15,000,000 64 %
=================
=
Sales 9,500,000
Employee discounts 500,000
Shoplifting losses 600,000
Shrinkage 400,000 11,000,000
Ending invty at retail 4,000,000
X cost ratio-conserv. 60 %
Ending invety at cost 2,400,000

7-2 What is estimated cost of ending inventory using the average cost approach?
4,000,000 x 64 % = 2,560,000

8. Barthelemy Company provided the following data:

Beginning inventory
Cost 500,000
Selling price 770,000
Purchase:
Cost 3,070,000
Selling price 4,300,000
Transportation in 70,000
Purchase discount 45,000
Purchase return:
Cost 25,000
Selling price 40,000
Sales return 80,000
Sales discount 20,000
Markup 100,000
Markdown 350,000
Cancelation of markup 30,000
Cancelation of markdown 10,000
Sales 4,000,000
8-1 What is the estimated cost of ending inventory using the lower of average cost and net
realizable value approach? This is the conservative or conventional approach.
Cost Retail
Beg invty 500,000 770,000
Purchases 3,070,000 4,300,000
Trans-in 70,000
PD (45,000)
PR (25,000) (40,000)
MU 100,000
MUC (30,000)
CGAFS – conservative 3,570,000 5,100,000 70 %
MD (350,000)
MDC 10,000
CGAFS - average 3,570,000 4,760,000 75 %
=================
=
Sales 4,000,000
Sales return (80,000) 3,920,000
Ending invty at retail 840,000
X cost ratio-conserv. 70 %
Ending invety at cost 588,000

8-2 What is the estimated cost of ending inventory using the average cost approach?
840,000 x 75 % = 630,000

9. Kitts and Nevis Company provided the following data:

Cost Retail
Beginning inventory 340,000` 640,000
Purchases 4,500,000 7,300,000
Freight in 100,000
Purchase return 150,000 250,000
Purchases allowance 90,000
Department transfer in 100,000 160,000
Net markup 150,000
Net markdown 500,000
Sales 6,600,000
Sales allowances 50,000
Employees discount 100,000
Spoilage and breakage 200,000
9-1 What is the estimated cost of ending inventory using the conservative retail?
Cost Retail
Beg invty 340,000 640,000
Purchases 4,500,000 7,300,000
Freight in 100,000
PR (150,000) (250,000)
PA (90,000)
DT - in 100,000 160,000
Net MU 150,000
CGAFS - conservative 4,800,000 8,000,000 60 %
Net MD (500,000)
CGAFS – average 4,800,000 7,500,000 64 %
=================
=
Sales 6,600,000
Employee discount 100,000
Spoilage & breakage 200,000 6,900,000
End invty at retail 600,000
X cost ratio 60 %
End invty at cost 360,000

9-2 What is the estimated cost of ending inventory using the average cost retail?
600,000 x 64 % = 384,000

10. Saint Lucia Company had always measured 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 manufacturing cost 1,340,000
Goods in process at cost:
January 1 612,000
December 31 752,000 140,000
Cost of goods manufactured 1,200,000 at cost
Finished goods at selling price:
January 1 240,000
December 31 840,000 600,000 600,000
Gross income 8000,000

10-1 What is the amount of goods manufactured at retail?

Step 1 Fill in the COGM cost, COGS retail, FG beg and FG end
Step 2 Work back and get the COGM retail ANSWER to 10-1 : 2,000,000
Step 3 Compute the cost ratio
Step 4 multiply the FG beg and FG end at retail by the cost ratio to get the
FG beg and FG end at cost
Step 5 Compute the COGS at cost ANSWER to 10-2

Cost Retail
Cost of goods manufactured 1,200,000 2,000,000  cost ratio 60 %
+ Finished goods inventory beg 144,000 240,000
-Finished goods inventory end (504,000) (840,000)
_________ __________
Cost of goods sold 840,000 1,400,000  based on sales

10-2. What is the cost of goods sold?

11. St Martin Company provided the following data for the current year:
Cost Retail
Beginning inventory 1,650,000 2,000,000
Net purchases 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%.

11-1 What is the amount of net purchases at original retail before markup and markdown?
6,400,000
11-2 What amount was reported as net sales? 6,000,000

11-3 What amount was reported as cost of goods sold?

 CGAFS at cost 5,850,000
Less : Inventory end at cost 1,950,000
COGS 3,900,000

Cost Retail
Beg inventory 1,650,000 2,000,000
Net purchases 4,200,000 6,400,000 7M+200T-800T
Net markup 800,000
Net markdown (200,000)
CGAFS – FIFO 4,200,000 7,000,000 60 %
CGAFS – Average 5,850,000 9,000,000 65 %
=================
Net sales 6,000,000 9M – 3 M
End invty at retail 3,000,000 Work back : 1,950T/65%
X cost ratio 65 % based on average cost ratio
End invty at cost 1,950,000 given

4,200,000 / 60 % = 7,000,000

7,000,000 + 2,000,000 = 9,000,000

12. Trinidad and Tobago Company adapted the FIFO approach of inventory pricing in
connection with use of the retail inventory method. The retail records showed the following.
2020 Cost Retail
Beginning inventory 556,800 928,000
Purchases 4,576,000 7,028,000
Net markup 42,000
Net markdown 30,000
Sales 6,840,000

2021
Purchases 4,760,000 6,812,000
Net markup 56,000
Net markdown 68,000
Sales 6,928,000

Determine the estimated cost of inventory on December 31 , 2020 and 2021 applying the FIFO
retail approach.
2020
Cost Retail
Beg inventory 556,800 928,000
Purchases 4,576,000 7,028,000
Net MU 42,000
Net MD (30,000)
CGAFS - FIFO 4,576,000 7,040,000 65 %
CGAFS 5,132,800 7,968,000
=================
=
Sales 6,840,000
End invty at retail 1,128,000
X cost ratio 65 %
End invty at cost 733,200

What is COGS in 2020?

CGAFS 5,132,800
Less End invty at cost 733,200
COGS 4,399,600

2021
Cost Retail
Beg inventory 733,200 1,128,000
Purchases 4,760,000 6,812,000
Net MU 56,000
Net MD (68,000)
CGAFS - FIFO 4,760,000 6,800,000 70 %
CGAFS 5,493,200 7,928,000
==================
=
Sales 6,928,000
End invty at retail 1,000,000
X cost ratio 70 %
End invty at cost 700,000

What is COGS in 2021?

CGAFS 5,493,200
Less End invty at cost 700,000
COGS 4,793,200
13. Turks and Caicos Company which employed the FIFO retail method provided the following
inventory data:
2020 Cost Retail
Beginning inventory 420,000 600,000
Purchases 5,011,200 6,890,000
Net markup 160,000
Net markdown 90,000
Sales 6,839,000

2021

Purchases 4,970,000 7,110,000

Net markup 100,000
Net markdown 110,000
Sales 7,033,000

Determine the estimated cost of inventory on December 31, 2020 and 2021 applying the FIFO
retail approach.
2020
Cost Retail
Beg inventory 420,000 600,000
Purchases 5,011,200 6,890,000
Net MU 160,000
Net MD (90,000)
CGAFS - FIFO 5,011,200 6,960,000 72 %
CGAFS 5,431,200 7,560,000
=================
Sales 6,839,000
End invty at retail 721,000
X cost ratio 72 %
End invty at cost 519,120

2021
Cost Retail
Beg inventory 519,120 721,000
Purchases 4,970,000 7,110,000
Net MU 100,000
Net MD (110,000)
CGAFS - FIFO 4,970,000 7,100,000 70 %
CGAFS 5,489,120 7,821,000
=================
Sales 7,033,000
End invty at retail 788,000
X cost ratio 70 %
End invty at cost 551,600