Question

The records of Alaska Company provide the following information for the year ended December 31.

	At Cost	At Retail
Jan 1 beginning inventory	\(469,010	\)928,950
Cost of Goods purchased	3,376,050	6,381,050
Sales		5,595,800
Sales return		42,800

Required

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

Short answer

Ending inventory totals$924,182.

Step-by-step solution

Step-By-Step Solution    Step 1: Definition of Retail Inventory Method

A method of calculating the cost of inventory under which the value of ending inventory is determined using the cost-to-retail ratio is known as the retail inventory method.

Calculation of Ending Inventory

Calculation of cost to retail ratio

$$\begin{gathered} \mathrm{Cost}-\mathrm{to}-\mathrm{retail}\mathrm{Ratio}=\frac{\mathrm{Beginninginventoryatcost}+\mathrm{Costofgoodspurchasedatcost}}{\mathrm{Beginninginventoryatretail}+\mathrm{Costofgoodspurchasedatretail}} \\ =\frac{\mathrm{\$}469,010+\mathrm{\$}3,376,050}{\mathrm{\$}928,950+\mathrm{\$}6,381,050} \\ =\frac{\mathrm{\$}3,845,060}{\mathrm{\$}7,310,000} \\ =0.526 \end{gathered}$$

Calculation of Ending Inventory:

$$\begin{gathered} \mathrm{EndingInventory}=(\mathrm{Beginninginventoryatretail}+\mathrm{Costofgoodspurchasedatretail}-\mathrm{Netsales})\times \mathrm{Cost}-\mathrm{to}-\mathrm{retailratio} \\ =(\mathrm{\$}928,950+\mathrm{\$}6,381,050-(5,595,800-42,800))\times 0.526 \\ =(\mathrm{\$}7,310,000-\mathrm{\$}5,553,000)\times 0.526 \\ =\mathrm{\$}924,182 \end{gathered}$$