Question

ABC Corporation is a new company that buys and sells office supplies. Business began on January 1, 2021.
ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete
physical inventory at year-end. A physical count was taken on December 31, 2021, and the inventory on-hand at
that time totaled $85,000, which reflects historical cost. Record the adjusting entry for properly recognizing
2021 Cost of Goods Sold. Hint: This was the first year of operations, so beginning inventory balance is zero.
Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level.
A review of inventory data further indicated that the current retail sales value of the ending inventory is $75,000 and estimated costs of
completion and shipping is 8% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory
using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting
for adjustments of inventory to market value.

Answer 1

Answer

Answer to first part requires information with respect to purchases made during the year.

Cost of goods sold =Beginning Inventory + purchases during the period - Ending Inventory =say $X

An adjusting entry will be made at end of the accounting period to record the cost of goods sold expense and reduce inventory so the balance in inventory matches the physical count.

Cost of goods sold Dr...$X

Merchandise Inventory Cr.. .$X

(To record cost of goods sold during period. )

Answer to Second Part: ending inventory is valued at the lower of cost and net realizable value

net realizable value = $75,000 - $75,000*8% =$69,000

Ending Inventory at cost =  $85,000

Loss expense reducing inventory to NRV = $85,000 - $69,000 = $6000

Adjusting entry

Loss expense reducing inventory to NRV Dr..$6000

Allowance to Reduce Inventory to NRV Cr..$6000