Q35PGB_1 - Horngren'S Financial And Managerial Accounting

Question

Some of L and K Electronics’s merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is\(32,000 below the business’s cost of the goods, which was \)98,000. Before any adjustmentsat the end of the period, the company’s Cost of Goods Sold account has a balanceof $410,000.

 

Requirements

1. Journalize any required entries.

Step-by-Step Solution

Answer

The cost of goods sold would be debited, and inventory would be credited by the reduced amount,which is $66,000. 

Step1: Reduction in inventory value

Based on the lower of cost or net realizable value, the inventory has been reduced by the following amount -$$\begin{gathered} \mathbf{\text{Reductionininventoryvalue=Historicalcost-Netrealizablevalue}} \\ \mathbf{\text{=\$98,000-\$32,000}} \\ \mathbf{\text{=\$66,000}} \end{gathered}$$

Step 2: Journal Entry

The reduced value of inventory would be treated as normal loss and would be adjusted in the cost of goods sold. The journal entry would be as follows –

Date	Description	Debit	Credit
Dec 31, 2018	Cost of goods sold	$66,000
	Merchandise Inventory		$66,000
	Being ending inventory adjusted for lower replacement cost