Question

A company's current LIFO inventory consists of 5,000 units purchased at $6 per unit. Replacement cost has now fallen to $5 per unit.
What is the entry the company must record to adjust inventory to market?

Answer 1

Answer:

Debit Inventory write off (p/l)   $5,000

Credit Inventory $5,000

Being entries to write down inventory to its realizable amount.

Explanation:

Inventories IAS 2 requires that inventory be carried at the lower of cost or net realizable value (after an initial recognition at the cost). The cost includes the cost of the item and other associated cost such as freight . However, its carrying amount(cost) must be reviewed to ensure it is not higher than the realizable value.

Given that the replacement cost has now fallen to $5 per unit which is lower than the cost of $6, it means that the amount that can be realized from the sale of a unit is $5.

= $6 - $5

= $1

Total adjustment required = $1 * 5000

= $5,000

Entries required to write down inventory to its realizable value

Debit Inventory write off (p/l)   $5,000

Credit Inventory $5,000

Being entries to write down inventory to its realizable amount.

Answer 2

Answer:

The company must record to adjust inventory to market is

Debit Cost of Goods Sold $5,000; credit Merchandise Inventory $5,000.

5,000 units * ($6 - $5) = $5,000