Question

Adjusting Ending Inventory to Market Value (Journal Entry)

a. Debit: Cost of Goods Sold, Credit: Inventory
b. Debit: Inventory, Credit: Cost of Goods Sold
c. Debit: Cost of Goods Sold, Credit: Retained Earnings
d. Debit: Retained Earnings, Credit: Cost of Goods Sold

Answer 1

The correct journal entry for adjusting ending inventory to market value, following the lower of cost or market rule, is to debit Cost of Goods Sold and credit Inventory. This assumes the loss in value is treated as an ordinary loss.

Step-by-step explanation:

The student is asking about the appropriate journal entry for adjusting ending inventory to its market value. According to the lower of cost or market (LCM) rule, if the market value of inventory is lower than its cost, an adjustment is needed to recognize this decline in value. The correct journal entry in this case is Debit: Cost of Goods Sold, Credit: Inventory, which corresponds to option a. This assumes the decline in value has been determined to be an ordinary loss as part of the cost of goods sold.