Question

A company reports merchandise inventory on December 31 at $250,000 but LCM applied to items is $200,000. Record the journal entry to report merchandise inventory at the correct amount.

Note: Enter debits before credits_____

Answer 1

To adjust the reported merchandise inventory to the lower cost or market value, a journal entry that debits the loss on inventory write-down and credits merchandise inventory for the difference, which is $50,000, is required.

Step-by-step explanation:

When a company reports merchandise inventory on their balance sheet, the value reported should be the lower of the cost or market value (LCM rule). In this scenario, merchandise inventory was reported at $250,000, but the LCM value is $200,000. Hence, the inventory needs to be written down to its market value which is $200,000, resulting in a $50,000 reduction.

The journal entry to record this adjustment would be:

• Debit Loss on Inventory Write-Down $50,000
• Credit Merchandise Inventory $50,000

This entry reflects the loss the company recognizes due to the inventory's market value being lower than its previously reported cost on the balance sheet.