Question

Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2018 are as follows: Cost Retail

COST RETAIL

Beginning inventory $ 89,000 $ 179,000

Purchases 352,000 579,000

Freight-in 8,900

Purchase returns 6,900 10,900

Net markups 15,900

Net markdowns 11,900

Normal spoilage 2,900

Abnormal spoilage 4,512 7,900

Sales 539,000

Sales returns 9,900

The company records sales net of employee discounts. Discounts for 2018 totaled $3,900. Required: 1. Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the average cost application. 2. Estimate Sparrow’s ending inventory and cost of goods sold for the year using the retail inventory method and the conventional application.

	Average Cost Application	Conventional Application
Estimate Ending Inventory at retail
Estimate Ending Inventory at Cost
Estimated Cost of goods sold

Answer 1

Answer:

1) Average Cost Method :-

Particulars	Cost ($)	Retail ($)
Beginning Inventory	89000	179000
Add : Purchase	352000	579000
Less : Purchase Returns	(6900)	(10900)
Add : Freight in	8900
Net Markup		15900
Less : Net Markdowns		(11900)
Abnormal Spoilage	(4512)	(7900)
Goods Available for sale (A)	438488	743200
Less : Normal Spoilage		(2900)
Less : Sales
Net Sales (539000-9900)		(529100)
Employee Disccounts		(3900)
Estimated Ending Inventory at Retail (B)		207300
Less : Estimated Ending Inventory at Cost (See Below) (B)	(122307)
Estimated Cost of goods sold (A-B)	316181	535900

Cost to Retail % :-

= (Goods Available for sale at cost / Goods Available for sale at retail)*100

= ($438488/ $743200)*100

= 59%

Amount of Estimated Ending Inventory at Cost :-

= Estimated Ending Inventory at Retail * Cost to Retail %

= $207300* 59%

= $122307

2) Conventional Method :-

Particulars	Cost ($)	Retail ($)
Beginning Inventory	89000	179000
Add : Purchase	352000	579000
Less : Purchase Returns	(6900)	(10900)
Add : Freight in	8900
Net Markup		15900
Abnormal Spoilage	(4512)	(7900)
Goods Available for sale (Before Net Markdowns)	438488	755100
Less : Net Markdowns		(11900)
Goods Available for Sale (After Net Markdowns)
Less : Normal Spoilage		(2900)
Less : Sales
Net Sales (539000-9900)		(529100)
Employee Disccounts		(3900)
Estimated Ending Inventory at Retail		207300
Less : Estimated Ending Inventory at Cost (See Below) (B)	(120379)
Estimated Cost of goods sold (A-B)	318109	547800

Cost to Retail % :-

= (Goods Available for sale at cost / Goods Available for sale at retail)*100

= ($438488/ $755100)*100

= 58.07%

Amount of Estimated Ending Inventory at Cost :-

= Estimated Ending Inventory at Retail * Cost to Retail %

= $207300 20* 58.07%

= $120379