On December 28, 20X4, Cockscomb, Inc. purchased inventory in anticipation of sta

Question

On December 28, 20X4, Cockscomb, Inc. purchased inventory in anticipation of starting business on January 1, 20X5, the first day of its fiscal year. The inventory has a value of $390,000 at retail, and S250,000 at cost. The company had the following items affecting sales and inventory for 20X5 COCKSCOMB, INC. RETAIL INVENTORY DATA FOR YEAR ENDING DECEMBER 31, 20X5 Cost Retail Purchases Purchase Returns Gross Sales (after employee discounts) Markups Markup Cancellations Markdowns Markdown Cancellations Emplovee Discounts Granted Loss From Breakage (Normal) 970,000 S 60,000 1,460,000 80,000 1,460,000 120,000 40,000 45,000 20,000 15,000 2,500 In addition, the company had purchase discounts of $18,000, freight in of $79,000, and sales returns of S97,500 The company wants to compare various retail inventory methods to see which best fits their operational plans. You have been asked to prepare schedules showing what ending inventory and cost of goods sold will be under the methods available

Explanation / Answer

1. Calculate the retail value of the goods available for sale

Retail value of goods available for sale = Retail value of opening inventory + Retail value of goods purchased.

= $390,000 + (1,460,000 – 80,000) = $1,770,000

2. Total sales during the period = $(1,460,000 + 15,000 – 97,500) = $1,377,500

3. Calculate total cost = Opening Inventory + cost of purchases

= $250,000 + (970,000 – 60,000 + 79,000) = $1,239,000

4. Cost to retail Percentage = $1,239,000 / 1,770,000 = 70%

5. Difference between Retail value of goods available for sale & Total sales during the period

= 1,770,000 – 1,377,500 = $392,500

6. Ending Inventory under retail inventory method = $392,500 x Cost retail percent (70%)

= $274,750

NOTE: In the given question, purchase discount is not considered for total cost since it is a cash discount received on payment to suppliers and therefore does not impact total cost. Moreover, markups and markdowns is the percent earned over the cost and therefore will not be considered for calculating the revenue as gross sales already includes and excludes both of them.

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