Chapter 6: Q 21E-1 (page 364)

Clarmont Resources, which uses the FIFO inventory costing method, has the following account balances at May 31, 2019, prior to releasing the financial statements for the year:
Merchandise Inventory, ending $ 13,500
Cost of Goods Sold 68,000
Net Sales Revenue 123,000
Clarmont has determined that the current replacement cost (current market value) of the May 31, 2019, ending merchandise inventory is $12,400.
Requirements
1. Prepare any adjusting journal entry required from the information given.

Short Answer

Expert verified

The adjusting entry would be made for $1,100 against the cost of goods sold for losing the value.

Step by step solution

Step-by-Step-SolutionStep 1: Lower of cost or market value rule

The cost of inventory is determined by following the lower of cost or market value rule. As per this rule, the inventory should always be valued at the lower price of the original cost or at the market value whichever is lower. This rule is followed due to the principle of conservatism.

In the given case,

The value of ending inventory at original cost: $13,500

The value of ending inventory at market value: $12,400

So as per the LCM rule, the ending inventory would be reported at $12,400.

Journal Entry for adjustment

For reporting the ending inventory at $12,400, the following adjustment entry would be made or the difference amount between the original cost and market value–

$D i f f r e n c e A m o u n t = O r i g i n a l c o s t - M a r k e t V a l u e = $ 13, 500 - $ 12, 400 = $ 1, 100$

	Journal entry
Date	Description	Debit	Credit

May 31	Cost of goods sold	$1,100
	Merchandise Inventory		$1,100
	Being inventory adjusted at market value

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	2019	2018	2017
Net Sales Revenue	\( 212,000	\) 161,000	\( 170,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\)22,000	\(28,000	\)41,000
Net cost of purchase	131,000	100,000	86,000
Cost of goods available for sale	153,000	128,000	127,000
Less: Ending Merchandise Inventory	34,000	22,000	28,000
Cost of goods sold	119,000	106,000	99,000
Gross Profit	93,000	55,000	71,000
Operating Expenses	63,000	28,000	39,000
Net Income	\( 30,000	\) 27,000	$ 32,000

Short Answer

Step by step solution

Step-by-Step-SolutionStep 1: Lower of cost or market value rule

Journal Entry for adjustment

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