Final answer:
The adjusting entry for applying the lower-of-cost-or-market rule involves debiting a loss account and crediting the inventory account to reduce its balance. This reflects inventory values at the lesser of cost or market and ensures accurate financial reporting.
Step-by-step explanation:
When applying the lower-of-cost-or-market rule in accounting, an adjusting entry is made to reflect inventory values at the lower of cost or market value. If the market value (current replacement cost) of the inventory falls below its recorded cost, an adjustment must be made to decrease the inventory value on the balance sheet and recognize the loss on the income statement.
An example of such adjusting entry would be:
- Debit the loss due to market decline of inventory account (expense)
- Credit the inventory account to reduce its balance
This entry ensures that the inventory is reported at the correct value on the balance sheet and that the loss is properly reflected on the income statement.
Over time, if market conditions change and the market value of the inventory increases, this loss may reverse following a similar but opposite adjustment.