Sparrow Company uses the retail inventory method to estimate ending inventory an
ID: 2508234 • Letter: S
Question
Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2018 are as follows: Cost $ 95,000 359,000 9,500 7,500 Retail $185,000 585,000 Beginning inventory Purchases Freight-in Purchase returns Net markups Net markdowns Normal spoilage Abnormal spoilage Sales Sales returns 11,500 16,500 12,500 3,500 8,500 545,000 10,500 4,354 The company records sales net of employee discounts. Discounts for 2018 totaled $4,500. 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. (For all requirements, round Cost-to-retail percentage to two decimal places and final answers to whole dollars.) Average cost application Conventional application Estimated ending inventory at retail Estimated ending inventory at cost Estimated cost of goods soldExplanation / Answer
1. Estimate Sparrow's ending inventory and cost of goods sold for the year using the retail inventory method and the average cost application:
Retail method is used for the purpose of valuation of closing inventory by the retailers who want to resell their merchandise. This method takes into consideration relationship between merchandise cost and retail price. According to this method value of ending inventory calculated is $211,500 and cost of goods sold is $542,500.
Under average cost method, valuation is done on the basis of average cost of goods that are available for the purpose of sale for the period for which such valuation is being done. According to this method value of ending inventory is $126,688.50 and cost of goods sold is $324,957.50
2. Estimate Sparrow's ending inventory and cost of goods sold for the year using the retail inventory method and the Conventional application (average, LCM):
Retail method is used for the purpose of valuation of closing inventory by the retailers who want to resell their merchandise. This method takes into consideration relationship between merchandise cost and retail price. According to this method value of ending inventory calculated is $211,500 and cost of goods sold is $542,500.
According to conventional method value of ending inventory is $124,622.57 and cost of goods sold is $327,023.43
Details Cost Retail Beginning Inventory $95,000.00 $185,000.00 Add: Purchase $359,000.00 $585,000.00 Add: Freight-in $9,500.00 $0.00 Total $463,500.00 $770,000.00 Less: Purchase Return -$7,500.00 -$11,500.00 Add: Net Markups $16,500.00 Less: Net Markdown -$12,500.00 Less: Abnormal Spoilage -$4,354.00 -$8,500.00 Goods Available for Sale $451,646.00 $754,000.00 Cost to Retail % = $451,646/$754,000 = 59.90% Less: Normal Spoilage $3,500.00 Less: Sales Net Sales ($545,000 - $10,500) = $534,500 Add: Employment Discounts = $4,500 $539,000.00 Estimated ending inventory at retail $211,500.00 Estimated ending inventory at cost ($211,500 * 59.90%) $126,688.50 Estimated cost of goods sold ($451,646 - $126,688.50) $324,957.50 $542,500.00Related Questions
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