Question

Davenport Department Store converted from the conventional retail method to the LIFO retail method on January 1, 2017, and is now considering converting to the dollar-value LIFO inventory method. During your examination of the financial statements for the year ended December 31, 2018, management requested that you furnish a summary showing certain computations of inventory cost for the past 3 years. Here is the available information. 1. The inventory at January 1, 2016, had a retail value of \(56,000 and cost of \)29,800 based on the conventional retail method. 2. Transactions during 2016 were as follows. Cost Retail Purchases \(311,000 \)554,000 Purchase returns 5,200 10,000 Purchase discounts 6,000 Gross sales revenue (after employee discounts) 551,000 Sales returns 9,000 Employee discounts 3,000 Freight-in 17,600 Net markups 20,000 Net markdowns 12,000 3. The retail value of the December 31, 2017, inventory was \(75,600, the cost ratio for 2017 under the LIFO retail method was 61%, and the regional price index was 105% of the January 1, 2017, price level. 4. The retail value of the December 31, 2018, inventory was \)62,640, the cost ratio for 2018 under the LIFO retail method was 60%, and the regional price index was 108% of the January 1, 2017, price level. Instructions (a) Prepare a schedule showing the computation of the cost of inventory on hand at December 31, 2016, based on the conventional retail method. (b) Prepare a schedule showing the recomputation of the inventory to be reported on December 31, 2016, in accordance with procedures necessary to convert from the conventional retail method to the LIFO retail method beginning January 1, 2017. Assume that the retail value of the December 31, 2016, inventory was \(60,000. (c) Without prejudice to your solution to part (b), assume that you computed the December 31, 2016, inventory (retail value \)60,000) under the LIFO retail method at a cost of $33,300. Prepare a schedule showing the computations of the cost of the store’s 2017 and 2018 year-end inventories under the dollar-value LIFO method.

Short answer

1. Ending inventory at cost equals $35,280.
2. Ending inventory equals $34,500.
3. Ending inventory in 2017 equals $40,986, and in 2018 equals $32,190.

Step-by-step solution

Calculation of ending inventory at retail

a. Ending inventory at retail is calculated as follows:

	Cost	Retail
Beginning inventory	$29,800	$56,000
Purchases	311,000	554,000
Purchase returns	(5,200)_	(10,000)
Purchase discounts	(6,000)
Freight in	17,600
Total
Add: Net markups		20,000
Totals	347,200	620,000
Deduct: Net Markdowns		12,000
Sales price of goods available		608,000
Deduct: Sales (net) ($551,000-$9,000)		542,000
Deduct: Employee discounts		3,000
Ending inventory at retail		$63,000
Cost to retail ratio (347,200/620,000)		56%
Ending inventory at cost ($63,000*56%)		$35,280

Calculation of inventory under LIFO Retail method

b. Inventory value under LIFO retail is calculated as follows:

	Cost	Retail
Beginning inventory	$29,800	$56,000
Purchases	311,000	554,000
Purchase returns	(5,200)_	(10,000)
Purchase discounts	(6,000)
Freight in	17,600
Add: Net markups		20,000
Deduct: Net Markdowns		12,000
Total excluding beginning inventory	317,400	552,000
Cost to retail ratio under LIFO retail method ($317,400/$552,000)		57.5%
Inventory cost under LIFO retail method ($60,000 x 57.5%)		$34,500

Calculation of ending inventory under the dollar-value LIFO retail method on December 31, 2017, and 2017

The ending inventory is calculated as follows for December 31,2017

Ending inventory at retail	$72,000
Beginning inventory at retail	60,000
Increase in inventory in retail	$12,000
Increase in terms of Year 2017 price ($12000 x 105%)	$12,600
Ending inventory at retail on LIFO basis
First layer ((33,300/60000) x 60,000 )	$33,300
Second layer ($12,600x 61%)	7,686	$40,986

*cost to retail ratio beginning inventory = $33,300/$60,000 = 55.5%

The ending inventory is calculated as follows for December 31, 2018.

Ending inventory	$62,640
Ending inventory in terms of Year 2018 price ($62,640/108%)	$58,000
Ending inventory per LIFO cost ($58,000 x 55.5%)	$32,190

Thus, inventory value in (a) equals $35,280, in (b) equals $34,500, and in (c) for year 2017 it equals $40,986, and for 2018 it equals $32,190.