Question

Metlock Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2021.

Inventory, October 1, 2021
At cost		$50,900
At retail		79,400
Purchases (exclusive of freight and returns)
At cost		289,140
At retail		422,700
Freight-in		16,500
Purchase returns
At cost		5,700
At retail		7,900
Markups		9,000
Markup cancellations		2,000
Markdowns (net)		3,700
Normal spoilage and breakage		10,100
Sales revenue		387,000

(a) Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-or-market inventory for October 31, 2021. (Round ratios for computational purposes to 0 decimal places, e.g 78% and final answer to 0 decimal places, e.g. 28,987.)

Ending inventory at lower-of-cost-or-market?

Answer 1

(a) Conventional retail method

	Cost	Retail
Beginning inventory	50900		79400
Purchases	289140		422700
Freight-in	16500
Purchase returns	-5700		-7900
Merchandise available for sale	350840		494200
Add:
Markups		9000
Less: Markup cancellations		-2000
Net Markups			7000
	350840		501200
Deduct:
Net Markdowns			3700
Sales revenue			387000
Normal spoilage and breakage			10100
Ending inventory at retail			100400

Under the conventional retail method, the cost to retail ratio is computed after net markups but before net markdowns.

Cost to retail ratio = $350840/$501200 = 70%

Estimated ending inventory at cost = Ending inventory at Retail x Cost to retail ratio = $100400 x 70% = $70280

Ending inventory at lower of cost or market: $70,280