Final answer:
Giron Company should record a journal entry to write down inventory by $50,000, debiting an Inventory Write-Down Expense and crediting Inventory. This reflects the loss in value when inventory’s net realizable value falls below cost. An accounting profit example is also provided, wherein a company's profit is $50,000 after subtracting the costs from the sales revenue.
Step-by-step explanation:
The Giron Company needs to record a write-down of inventory because the net realizable value ($175 per unit) is lower than the cost ($200 per unit) as per the lower-of-cost or market (LCM) rule. Given that there are 2,000 units of inventory, the total value difference between the cost and the net realizable value is ($200 - $175) * 2,000 = $50,000. To record this inventory write-down, Giron Company would make the following journal entry:
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- Debit Inventory Write-Down Expense for $50,000
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- Credit Inventory for $50,000
This entry reduces the inventory value on the balance sheet and recognizes the loss in value as an expense on the income statement.
Example Calculation of Accounting Profit
Based on the provided scenario unrelated to the main question, if a firm had sales revenue of $1 million last year and incurred $600,000 on labor, $150,000 on capital, and $200,000 on materials, its accounting profit can be calculated as follows:
Sales Revenue - (Labor Costs + Capital Costs + Material Costs) = Accounting Profit
$1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000
Therefore, the firm's accounting profit was $50,000.