Question

The records of Macklin Co. provide the following information for the year ended December 31.

	At cost	At Retail
January 1, Beginning Inventory	\(90,022	\)115,610
Cost of Goods Purchased	502,250	761,830
Sales		782,300
Sales Return		3,460

Required

1. Use the retail inventory method to estimate the company’s year-end inventory

Short answer

Ending Inventory under the retail method is equal to$66,555.

Step-by-step solution

Definition of Sales Return

Sales return can be defined as the amount of goods purchased from any supplier being returned because of any defect or wrong receipt of an order.

Ending Inventory Using the Retail Inventory Method

Calculation of cost to retail ratio

$$\begin{gathered} \mathrm{Cost}\mathrm{to}\mathrm{retail}\mathrm{ratio}=\frac{\mathrm{Beginning}\mathrm{inventory}\mathrm{at}\mathrm{cost}+\mathrm{cost}\mathrm{of}\mathrm{goods}\mathrm{purchased}\mathrm{at}\mathrm{costs}}{\mathrm{Beginning}\mathrm{inventory}\mathrm{at}\mathrm{retail}+\mathrm{cost}\mathrm{of}\mathrm{goods}\mathrm{purchased}\mathrm{at}\mathrm{retail}} \\ =\frac{\$90,022+\$502,250}{\$115,610+\$761830} \\ =\frac{\$592,272}{\$877,440} \\ =0.675 \end{gathered}$$

Calculation of Ending Inventory:

$$\begin{gathered} \mathrm{Ending}\mathrm{Inventory}=\left(\mathrm{Beginning}\mathrm{inventory}\mathrm{at}\mathrm{retail}+\mathrm{cost}\mathrm{of}\mathrm{goods}\mathrm{purchased}\mathrm{at}\mathrm{retail}-\mathrm{Net}\mathrm{sales}\right)\times \mathrm{cost}\mathrm{to}\mathrm{retail}\mathrm{ratio} \\ =\left(\$115,610+\$761,830-(\$782,300-\$3,460)\right)\times 0.675 \\ =\left(\$877,400-\$78,840\right)\times 0.675 \\ =\$66,555 \end{gathered}$$