Question

Part Seven: Problem (10 points) Noa Corporations uses the retail inventory method to estimate its ending inventory. The following information relates to Noa Corporation's inventory at both cost and retail for the current year. Description Beginning Inventory Purchases Purchase discount Cost $55,000 250,000 10,000 Retail $78,500 325,000 Freight-In Additional markups Markup cancellations Markdowns Markdown cancellations Sales 5,000 24,000 7.000 12,000 3,500 400,000 Instructions: Answer each of the following questions. A. What is the ending inventory at retail? B. If the ending inventory is to be valued at conventional retail method, the calculation of the cost to retail ratio should be based on what cost and retail? C. Using the conventional retail method, calculate the approximate cost of ending inventory.

Answer 1

A)

Ending Inventory at Retail is $12,000.

See working note for supporting calculations.

B)

Cost to retail ratio is calculated by using the cost of $300,000 and retail amount of $420,500.

See working note for supporting calculations.

C)

Cost of Ending Inventory is $8,561.

Supporting calculations:

	Cost		Retail
Beginning Inventory at cost & at retail	$55,000		$78,500
Add: Purchases at cost & retail	$250,000		$325,000
Less: Purchase Discounts at cost	($10,000)		-
Add: Freight-In at cost	$5,000		-
Total Value of Inventory before Mark Ups	$300,000		$403,500
Add: Net Markups:
Markups		$24,000
Less: Markup cancellation		($7,000)	$17,000
Total Value of Inventory before Mark Downs	$300,000		$420,500
Less: Net Markdowns:
Markdowns		($12,000)
Less: Markdown cancellations		$3,500	($8,500)
Goods available for sale at retail			$412,000
Less: Net Sales revenue:
Gross sales revenue		($400,000)
Less: Sales returns and allowances		$0	($400,000)
Ending Inventory at Retail			$12,000
Cost to retail ratio ($300,000/$420,500*100 = 71.34%)
Ending Inventory at Cost ($12,000*71.34/100)	$8,561