Question

Suppose management estimated the market valuation of some obsolete inventory at $99,000; this inventory was recorded at $120,000, which resulted in recognizing a loss of $21,000. The auditors obtained the following information: The inventory in question could be sold for an amount between $78,000 and $92,000. The costs of advertising and shipping could range from $5,000 to $7,000.
Required:
a. Would you propose an audit adjustment to the management estimate?
A. Yes
B. No
b. Prepare the appropriate accounting entry. (In cases where no entry is required, please select the option "No journal entry required" for your answer to grade correctly. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
General Journal Debit Credit

Answer 1

Answer:

a. Yes.  I would propose an audit adjustment to the management estimate.

b. Appropriate Journal Entry:

Debit Cost of goods sold (Inventory Write-down) $28,000

Credit Inventory $28,000

To adjust the inventory to the net realizable value.

Explanation:

a) Data and Calculations:

Management estimated market value of inventory = $99,000

Record cost of inventory = $120,000

Recognized loss = $21,000

Auditor's estimate of inventory net realizable value = $71,000 ($78,000 - $7,000)

Required adjustment of inventory value = $28,000 ($99,000 - $71,000)