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, 2016, and the inventory on-hand at that time totaled $70,000, which reflects historical cost. Record the adjusting entry for properly recognizing 2016 Cost of Goods Sold. Hint: This was the first year of operations, so beginning inventory balanace is zero.

Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. A review of inventory data further indicated that the current retail sales value of the ending inventory is $60,000 and estimated costs of completion and shipping is 10% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting for adjustments of inventory to market value.

Explanation / Answer

Entry for 2016 COGS:

Closing balance of inventory is to be reduced from cost of goods available for sale to get the Cost of goods sold. Hence the following entry needs to be passed:

Debit: Inventory 70,000

Credit: Cost of goods sold 70000

Adjustment entry for NRV:

As per the conservatism principle, Inventory is to be valued at cost or Net realizable value (NRV).

Now cost = 70000 and NRV = 60,000 + 10% of retail sales = 66000. Since NRV is lower than Cost, we need to recognize this write down in value in income statement.

Debit: Allowance to reduce inventory to NRV 4000

Credit: Loss on inventory write down 4000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.