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Mademuasel [1]
3 years ago
14

Canton Trade Mart has recently had lackluster sales. The rate of inventory turnover has​ dropped, and the merchandise is gatheri

ng dust. At the same​ time, competition has forced Canton​'s suppliers to lower the prices that Canton will pay when it replaces its inventory. It is now December​ 31, 2018​, and the net realizable value of Canton​'s ending inventory is $ 50,000 below what the company actually paid for the​ goods, which was $270,000. Before any adjustments at the end of the​ period, the Cost of Goods Sold account has a balance of $760,000.a. What accounting action should Canton take in this​situation?b. Give any journal entry required.c. At what amount should the company report Inventory on the balance​ sheet?d. At what amount should the company report Cost of Goods Sold on the income​ statement?e. Discuss the accounting principle or concept that is most relevant to this situation.
Business
2 answers:
Mrrafil [7]3 years ago
7 0

Answer:

a. What accounting action should Canton take in this​situation?

  • the inventory value must decrease by $50,000 (report inventory at net realizable value)

b. Give any journal entry required.

  • Dr Cost of goods sold 50,000
  •      Cr Merchandise Inventory 50,000

c. At what amount should the company report Inventory on the balance​ sheet?

  • $220,000 (net realizable value)

d. At what amount should the company report Cost of Goods Sold on the income​ statement?

  • COGS = $810,000

e. Discuss the accounting principle or concept that is most relevant to this situation.

  • Conservatism principle states that expenses and liabilities must be recorded immediately.
Tomtit [17]3 years ago
6 0

Answer:

Explanation:

Canton Trade Mart has recently had lackluster sales. The rate of inventory turnover has​ dropped, and the merchandise is gathering dust. At the same​ time, competition has forced Canton​'s suppliers to lower the prices that Canton will pay when it replaces its inventory. It is now December​ 31, 2018​, and the net realizable value of Canton​'s ending inventory is $ 50,000 below what the company actually paid for the​ goods, which was $270,000. Before any adjustments at the end of the​ period, the Cost of Goods Sold account has a balance of $760,000.

a. What accounting action that Canton should take in this​ situation is inventory write down - from cost to net realizable Value as is prescribed by financial reporting standards.

b. Give any journal entry required.

JOURNAL ENTRY

Dr. Cost of Goods Sold......(270,000 - 50,000)...$220,000

Cr. Inventory...................................................................................$220,000

Being inventory write down of closing inventory to net realizable value at year end.

c. At what amount should the company report Inventory on the balance​ sheet?

Net Realizable Value of  $50,000

d. At what amount should the company report Cost of Goods Sold on the income​ statement?

Cost of Goods Sold had a previous account balance of $760,000 and will now include the inventory write down of $220,000 making $980,000

e. Discuss the accounting principle or concept that is most relevant to this situation.

International Accounting Standard 2 (IAS 2) stipulates that inventory should be carried at the <u>lower of Cost or Net Realizable Value</u>

<u />

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