A retailer has a beginning monthly inventory valued at
135,000 at retail. Net purchases during the month are
70,000 at cost. Transportation charges are
150,000. Markdowns and discounts equal
110,000 (at retail) on hand. Compute the following: a. Total merchandise available for sale — at cost and at retail b. Cost complement c. Ending retail book value of inventory d. Stock shortages e. Adjusted ending retail book value f. Gross profit
The Correct Answer and Explanation is:
Given:
- Beginning inventory (at retail): $135,000
- Net purchases (at cost): $70,000
- Transportation charges (cost): $150,000
- Markdowns and discounts (at retail): $110,000
Note: To properly apply the retail method, we also need net purchases at retail, but since it’s not directly given, we will assume that total retail value includes markdowns.
Step A: Total merchandise available for sale
We must find both at cost and at retail values.
At Cost:
Net Purchases (cost) = $70,000
Transportation Charges = $150,000
Total at Cost = $70,000 + $150,000 = $220,000
At Retail:
Beginning Inventory = $135,000
Markdowns = $110,000
Total at Retail = $135,000 + $110,000 = $245,000
Step B: Cost Complement
This is the ratio of cost to retail value:Cost Complement=Total Merchandise at CostTotal Merchandise at Retail=220,000245,000≈0.89796\text{Cost Complement} = \frac{\text{Total Merchandise at Cost}}{\text{Total Merchandise at Retail}} = \frac{220,000}{245,000} \approx 0.89796Cost Complement=Total Merchandise at RetailTotal Merchandise at Cost=245,000220,000≈0.89796
Step C: Ending Retail Book Value of Inventory
Assuming all inventory has not yet been sold and based on markdowns on hand:
Ending Retail Inventory = $110,000
Step D: Stock Shortages
We assume no stock shortages are explicitly stated, so we estimate using given data. If physical inventory is less than the book value, the difference is the shortage. Since the question gives no physical count, assume:
Stock Shortages = $0 (unless otherwise provided)
Step E: Adjusted Ending Retail Book Value
Since no shortage is indicated:
Adjusted Ending Retail Inventory = $110,000
Step F: Gross Profit
We calculate ending inventory at cost first:Ending Inventory at Cost=Adjusted Ending Retail×Cost Complement=110,000×0.89796≈98,775.60\text{Ending Inventory at Cost} = \text{Adjusted Ending Retail} \times \text{Cost Complement} = 110,000 \times 0.89796 \approx 98,775.60Ending Inventory at Cost=Adjusted Ending Retail×Cost Complement=110,000×0.89796≈98,775.60
Then calculate Cost of Goods Sold (COGS):COGS=Total Merchandise at Cost−Ending Inventory at Cost=220,000−98,775.60=121,224.40\text{COGS} = \text{Total Merchandise at Cost} – \text{Ending Inventory at Cost} = 220,000 – 98,775.60 = 121,224.40COGS=Total Merchandise at Cost−Ending Inventory at Cost=220,000−98,775.60=121,224.40
Now, Gross Profit = Total Sales (at retail) – COGSSales (Retail)=Total Merchandise at Retail−Ending Retail Inventory=245,000−110,000=135,000\text{Sales (Retail)} = \text{Total Merchandise at Retail} – \text{Ending Retail Inventory} = 245,000 – 110,000 = 135,000Sales (Retail)=Total Merchandise at Retail−Ending Retail Inventory=245,000−110,000=135,000Gross Profit=135,000−121,224.40=13,775.60\text{Gross Profit} = 135,000 – 121,224.40 = 13,775.60Gross Profit=135,000−121,224.40=13,775.60
Final Answers:
a. Total merchandise available
• At cost: $220,000
• At retail: $245,000
b. Cost complement: 0.89796
c. Ending retail book value of inventory: $110,000
d. Stock shortages: $0 (assumed)
e. Adjusted ending retail book value: $110,000
f. Gross profit: $13,775.60
This method helps estimate ending inventory and gross profit when retail prices and cost data are available but detailed inventory counts are missing.
