ABC uses a periodic inventory system, and the ending inventory for each year is

Question

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete physical inventory at year-end. A physical count was taken on December 31, 2015, and the inventory on-hand at that time totaled $50,000, which reflects historical cost. A review of inventory data further indicated that current replacement value of the ending inventory is $45,000, the retail sales value of the ending inventory is $182,000, estimated cost of completion and disposal is 72.5% of retail, and normal profit margin is 1.25% of retail value. Record the adjusting entry for properly recognizing 2015 Cost of Goods Sold. Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost or market at a total inventory level. Be sure to make an additional adjustment, if necessary, to properly value ending inventory using the Loss and Allowance methodology

Explanation / Answer

Cost of goods sold:

the retail sales value of the ending inventory= $182,000

Less: Profit margin (1.25%) = $ 2,275

cost of goods sold= = $179,725

Less: cost of completion (72.50%) = $131,950

cost of inventory used = $ 47775

Less: Historical cost of inventory = $ 50000

Loss on inventory on hand = $ 2225

Journal entry for the adjustment of the Loss:

Debit Loss on Inventory $2225

Credit Inventory on hand $2225

Using the Loss and Allowance methodology:

Debit Loss on Inventory $5000

Credit Allowance for Inventory adjustment $5000

(being historical value is $50,000 - market value of inventory $45,000)

Debit Allowance for Inventory adjustment $2225

Credit Inventory on hand $2225

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