Question

Lance-Hefner Specialty Shoppes decided to use the dollar-value LIFO retail method to value its inventory. Accounting records provide the following information: Retail $316,000 $400, 000 695, 000 26,000 21,000 500,000 Cost Merchandise inventory, January 1, 2018 Net purchases Net markups Net markdowns 581, 000 Net sales Related retail price indexes are as follows January 1, 2018 December 31, 2018 1.00 1.25 Require Determine ending inventory and cost of goods sold. Ending inventory at retail Ending inventory at cost Cost of goods sold

Answer 1

Calculation of Cost of Goods Sold

	Cost	Retail
Opening Inventory	$316,000	$400,000
Add: Net purchases	581,000	695,000
Add: Net markups		26,000
Less: Net markdowns		21,000
Goods available for Sale (excluding opening Inventory)	581,000	700,000
Goods available for Sale (including opening Inventory) (A)	897,000	1,100,000
Base layer cost-to-retail percentage ($316,000 ÷ $400,000 = 79%)
2018 layer cost-to-retail percentage ($581,000 ÷ $700,000 = 83%)
Less: Net sales		500,000
Estimated ending inventory at current year retail prices		600,000
Less: Estimated ending inventory at cost (see notes below) (B)	399,000
Estimated cost of goods sold (A-B)	498,000

Working Notes:

i) Calculation of Estimated Ending Inventory at Cost:

Estimated Inventory at Year-end Retail Prices = 600,000

Step 1: Ending Inventory at Base Year Retail Prices = $600,000/1.25 =$480,000

Step 2: Inventory Layers at Base year Retail Prices = $400,000*1.00*79% = $316,000

Then the cost of remaining Inventory ($480,000 - $400,000) which is of current year will be calculated as per the 2018 layers cost to retail percentage after taking into account the retail price index.

Step 3: Inventory Layers Converted to Cost = $80,000*1.25*83% = $83,000

Total Ending Inventory at LIFO retail cost = Step 2 + Step 3 = $316,000 + $83,000 = $399,000