Question

In 2020, Orear Manufacturing purchased inventory in 2020 for $700,000. Before the December 31, 2020 balance sheet date, the goods became damaged; therefore, the company could only receive $510,000 if they were to sell the goods on December 31, 2020. The amount that goods should be reported on the December 31, 2020 balance sheet is:

Group of answer choices

510000

700000

700000 plus a normal mark-up

510000 plus a normal mark-up

Answer 1

As per the accounting standard the goods at the end of the year should be valued at cost or net realizable value whichever is lower . This method is known as conservatism which means that there should be no overstatement of asset as well as income.

So in the above case the purchased inventory for $700,000 was damage and the net realizable value of those goods at the end of the year was $510,000 . As the net realizable value is lower than the purchased amount therefore the good should be reported on the net realisable value on December 31, 2020 which is $510,000

Therefore the correct answer is $510,000

So the correct option is 1st.