identify assumptions and concepts and correct entries.
The company used the average cost formula to determine that the cost of merchandise inventory at december 31 was $65,000. on December 31, it would have cost $80,000 to replace the merchandise inventory, so the following entry was made:
Merchandise Inventory (DR.) $15,000
Gain on Inventory (CR.) $15,000
Please try your later post, which I saw first.
Sra
Thank u Sra^_^
Assumptions:
1. The company values its inventory using the average cost formula.
2. The cost of merchandise inventory is determined as $65,000 at December 31.
3. On December 31, the replacement cost of the merchandise inventory was $80,000.
Concepts:
1. Average Cost Formula: This is a method of valuing inventory where the cost is calculated by taking the average of the unit costs of all items in the inventory.
Corrected Entries:
Based on the information provided, the entries seem incorrect. The assumption that the company used the average cost formula suggests that the inventory should be recorded at its cost of $65,000. However, if the replacement cost on December 31 was $80,000, the inventory value should be adjusted to reflect the lower cost. This adjustment is known as the lower of cost or market rule.
Corrected entries would be as follows:
Merchandise Inventory (DR.) $65,000
Loss on Inventory (CR.) $15,000
Merchandise Inventory Adjustments (CR.) $50,000
In this entry, the Merchandise Inventory account is debited with the original cost of $65,000. The Loss on Inventory account is credited with the difference between the original cost and the replacement cost ($65,000 - $80,000 = $15,000). And finally, the Merchandise Inventory Adjustments account is credited with the adjustment amount of $50,000 ($80,000 - $65,000 = $15,000).
This adjustment entry reflects the decrease in the value of the inventory and recognizes the potential loss to the company.