Question

On April 1, a company purchased two units of Inventory, A and B. The cost of unit A was $625, and the cost of unit B was $565. On April 30, the company had not sold the Inventory. The net realizable value of unit A was now $650 while the net realizable value of unit B was $475. The adjustment associated with the lower of cost and net realizable value on April 30 will be: 65 1. Cost of Goods Sold U Inventory 2. Inventory Cost of Goods Sold 3. Cost of Goods Sold Inventory 4. Inventory U cost of Goods Sold 90 LO O O O Option 4 Option 1 Option 2

Answer 1

Solution :

As per the information given in the question we have

Unit A:

Cost = $ 625   ; Net realizable value = 650

Lower of cost and realizable value for Unit A is its cost.

Thus Unit A has been correctly recorded at a cost of $ 625.

No adjustment entry is required for the same.

Unit B:

Cost = $ 565   ; Net realizable value = 475

Lower of cost and realizable value for Unit B is its Net Realizable value.

Hence the Inventory cost of Unit B has to be lowered by ( $ 565 - $ 475 ) = $ 90

( In order to give effect to the adjustment for lower of cost or net realizable value on April 30 )

The adjustment entry that is to be passed for the same is

Crediting the Inventory account with $ 90 and making a corresponding debit to the Cost of goods sold account with $ 90

Thus the adjustment entry is

Cost of Goods Sold         $ 90

           Inventory                        $ 90

Thus the solution is Option 3.