Data below for the year ended December 31, 2021, relates to Houdini Inc. Houdini started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory. Cost Retail

Beginning inventory $92,000 $118,000
Net purchases 385,560 560,000
Net markups 34,000
Net markdowns 54,000
Net sales 501,000

Estimated ending inventory at cost is:

Estimated ending inventory at cost is $119,846.

Explanation:

This can be estimated using the following steps:

Step 1: Calculation of cost to retail ratio

This can be calculated as follows:

Net purchases at cost = $385,560

Adjusted net purchase at retail price = Net purchases at retail price + Net markups - Net markdowns = $560,000 + $34,000 -  $54,000 = $540,000

Cost to retail ratio = Net purchases at cost / Adjusted net purchase at retail price = $385,560 / $540,000 = 0.7140, or 71.4%

Step 2: Calculation of LIFO layer

Ending inventory at retails price = Adjusted net purchase at retail price + Beginning inventory - Net sales = $540,000 + $118,000 - $501,000 = $157,000

LIFO layer = Ending inventory at retails price - Beginning inventory = $157,000 - $118,000 = $39,000

Step 3: Estimation of ending inventory at cost

Ending inventory at cost = Beginning inventory at cost + (LIFO layer * Cost to retail ratio) = $92,000 + ($39,000 * 71.4%) = $119,846

Therefore, estimated ending inventory at cost is $119,846.

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