Question

At December 31, Hardball Company has ending inventory with a historical cost of $316,000 and the company uses the perpetual inventory system. The current replacement cost of the inventory is $306,500 with a net realizable value is $325,000. The normal profit on this inventory is $25,000. Before any adjustments at the end of the period, the cost of goods sold account has a balance of $450,000. Which of the following journal entries is required on December 31 to adjust the ending balance of inventory if the direct method is used to record the lower of cost or market write down?
a. Cost of Goods Sold $9,000 $9,000
Inventory
b. Inventory Cost of Goods Sold $9,000 $9,000
c. Cost of Goods Sold $9,500 $9,500 Inventory
d. Loss on inventory write down Inventory $9,500 $9,500

Answer 1

Answer: c. Cost of Goods Sold $9,500 $9,500 Inventory.

Explanation:

The journal entries that is required on December 31 to adjust the ending balance of inventory if the direct method is used to record the lower of cost or market write down will be gotten as the difference between the historical cost of the ending inventory and the current replacement cos of inventory. This will be:

= $316000 - $306500

= $9500

Therefore, the journal entry will be:

Debit: Cost of Goods Sold $9,500

Credit: Inventory $9,500.