Sunland Co. uses the retail inventory method. The following information is available for the current year. Cost Retail Beginning inventory $ 318000 $494000 Purchases 1240000 1720000 Freight-in 23000 — Employee discounts — 8500 Net markups — 66000 Net markdowns — 86000 Sales revenue — 1620000 If the ending inventory is to be valued at approximately lower of average cost or market, the calculation of the cost ratio should be based on cost and retail of

Sunland Co.

The calculation of the cost ratio should be based on cost and retail of $1,581,000 and $2,288,500 respectively.

Explanation:

a) Data and Calculations:

                                                 Cost            Retail      Cost to Retail Ratio

Beginning inventory           $ 318,000      $494,000

Purchases                           1,240,000      1,720,000

Freight-in                                23,000             —

Employee discounts                     —               8,500

Net markups                                 —             66,000

Goods available for sale $1,581,000    $2,288,500      69.08%

Less:

Net markdowns                           —              86,000

Sales revenue                              —         1,620,000

Estimated ending Inventory at retail      $582,500

Estimated ending Inventory

at cost                              $402,391 ($582,500 * 69.08%)

Calculation of the cost ratio = $1,581,000/$2,288,500 * 100 = 69.08%

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