Question

Sticky Company’s merchandise inventory balance at year end is $15,050, but a physical count reveals that only $15,000 of inventory exists. The adjusting entry to record the shrinkage includes:
(A) Credit to Cost of Goods Sold for $50

(B) Credit to Merchandise Inventory for $50

(C) Debit to Cost of Goods Sold for $50

(D) Debit to Merchandise Inventory for $50

Answer 1

Answer: (B) Credit to Merchandise Inventory for $50

              (C) Debit to Cost of Goods Sold for $50

We will make these 2 adjusting entries and the reason for that is because the inventory is decreasing by 50 and it is an asset and when asset decreases we credit it. Now that we know that inventory is 15,000 the other 50 must have been cost of goods sold, so cost of goods sold need to be increased by 50 and we will debit cost of good sold by 50 because it is an expense and whenever an expense increases we debit it.

Explanation: