Question

Presented below is information related to Waveland Inc. Cost Retail Inventory, 12/31/17 \(250,000 \) 390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 — Gross sales revenue (after employee discounts) — 1,410,000 Sales returns — 97,500 Markups — 120,000 Markup cancellations — 40,000 Markdowns — 45,000 Markdown cancellations — 20,000 Freight-in 42,000 — Employee discounts granted — 8,000 Loss from breakage (normal) — 4,500 486 Chapter 9 Inventories: Additional Valuation Issues Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2018.

Short answer

Ending inventory at cost equals $305,000.

Step-by-step solution

Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows:

	Cost		Retail
Beginning inventory	$250,000		$390,000
Purchases	914,500		1,460,000
Purchase returns	(60,000)		(80,000)
Purchase discounts	(18,000)
Freight in	42,000
Total	1,128,500		1,770,000
Add: Net markups
Markups		120,000
Markup cancellations		40,000	80,000
Totals	1,128,500		1,850,000
Deduct: Net Markdowns
Markdowns		45,000
Markdown cancellations		20,000	25,000
Sales price of goods available			1,825,000
Deduct: Sales (net) ($1,410,000-$97,500)			1,312,500
Deduct: Inventor loss due to breakage			4,500
Deduct: Employee discounts			8,000
Ending inventory at retail			$500,000

Calculation of the cost-to-retail ratio

The cost-to-retail ratio is calculated as follows:

$$\begin{gathered} \mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{RetailRatio}\mathbf{=}\frac{\mathbf{InventoryatCost}}{\mathbf{InventoryatRetail}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{128}\mathbf{,}\mathbf{500}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{850}\mathbf{,}\mathbf{000}} \\ \mathbf{=}\mathbf{61}\mathbf{\%} \end{gathered}$$

Calculation of ending inventory at cost

Ending inventory at cost is calculated as follows:

$$\begin{gathered} \mathbf{Ending}\mathbf{}\mathbf{Inventory}\mathbf{}\mathbf{at}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Ending}\mathbf{}\mathbf{Inventory}\mathbf{}\mathbf{at}\mathbf{}\mathbf{Retail}\mathbf{\times }\mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Retail}\mathbf{}\mathbf{Ratio} \\ \mathbf{=}\mathbf{\$}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{61}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{305}\mathbf{,}\mathbf{000} \end{gathered}$$

Thus, ending inventory at cost equals $305,000.