Question

Nutritional Foods reports merchandise inventory at the lower of the cost or market. Prior to releasing its financial statements for the year ended March 31,2015, Nutritional's preliminary income statement, before the year end adjustments is as follows:
Sales revenue $121000

Cost of goods sold $49000

Gross Profit $72000

Nutritional has determined that the current replacement cost of ending merchandise inventory is $16000. Cost is $21000.

1. Journalize the adjusting entry for merchandise inventory, if any is required.

2. Prepare a revised partial income statement to show how Nutritional Foods should report sales, cost of goods sold, and gross profit.

Answer 1

Answer:

1. Debit Cost of goods sold  $5,000

Credit Inventory account   $5,000

Being entries to write down merchandise inventory to its realizable amount.

2. Revised partial Income statement

                                         Amount

Sales revenue                 $121,000

Cost of goods sold         ($54,000 )

Gross Profit                      $67,000

Explanation:

According to IAS 2 inventories, Inventory is initially be recognized at the cost of purchase (which includes the cost of the item and other associated cost such as freight)

Subsequently, inventory would be measured at the lower of cost or net realizable value.

As such, whenever the cost is higher than the net realizable value, the cost of the inventory will be written down by

Since the current replacement cost of ending merchandise inventory is $16000 and the Cost is $21000.

Amount to be written down

= $21000 - $16000

= $5,000

To adjust for this,

Debit Cost of goods sold  $5,000

Credit Inventory account   $5,000

Total amount in cost of goods sold = $49,000 + $5,000

= $54,000

Revised partial Income statement

                                      Amount

Sales revenue                $121,000

Cost of goods sold          $54,000

Gross Profit                      $67,000