Assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that as a result of new technology the
company could buy the same computer today for $600. Which of the following journal entries would be required to show the inventory at the lower of cost or market? a.
Account Titles Debit Credit
Inventory 600
Cost of Goods Sold 600
b.
Account Titles Debit Credit
Cost of Goods Sold 600
Inventory 600
c.
Account Titles Debit Credit
Inventory 200
Cost of Goods Sold 200
d.
Account Titles Debit Credit
Cost of Goods Sold 200
Inventory 200
Explanation: Cost of goods sold(COGS) is the total amount spent directly to produce the goods which was sold, it can be calculated as follows
COGS = Beginning Inventory + Purchases During the Period – Ending Inventory.
Inventory is a term used to describe materials of value to an organisation that are in different stage such as RAW MATERIALS,WIP(WORK IN PROGRESS) AND FINISHED GOODS.
To show the inventory at the lower of cost or market the journal entry should be entered as follows; Account Titles Debit Credit
Inventory $200
Cost of Goods Sold $200.
The $200 represented the difference between $800 and $600 which is equal to $200. The $200 will be entered as the cost of goods sold.
