On april 1, a company purchased two units of inventory, a and b. The cost of unit a was $650, and the cost of unit b was $590. On april 30, the company had not sold the inventory. The net realizable value of unit a was now $665 while the net realizable value of unit b was $505. The adjustment associated with the lower of cost and net realizable value on april 30 will be:
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Explanation:
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Answer: Dr Cost of Goods Sold 70
Cr Merchandise Inventory 70
Explanation:
We must compute the difference between the net realizable values and the original purchase prices in order to establish the appropriate adjustment:
Product A:
Product B:
Now we add both differences:
The assets have diminished in value because the number is negative.
The merchandise inventory account needs to be credited because the assets have decreased in value (when assets decrease they are credited). The COGS account should be debited because the decline in value corresponds to increased COGS (when expenses increase they are debited).
Dr Cost of Goods Sold 70
Cr Merchandise Inventory 70
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