Final answer:
The question pertains to a business scenario where the market price is below production costs, necessitating a write-down in inventory value. The associated journal entry reflects the loss due to this decrease, adjusting the inventory accordingly. The self-check question calculates the firm's accounting profit, which in the example provided is $50,000.
Step-by-step explanation:
The question addresses a situation where the market price of goods falls below their production cost, leading businesses to face losses on their sales. This is a common occurrence in markets where demand and supply determine prices. A write-down is necessary in this case to adjust the value of the inventory on the firm's balance sheet to reflect the lower market price. When the market price drops below the cost, the company must record a journal entry (JE) to recognize this impairment. The entry debits a loss account, such as 'Loss on Inventory Write-down,' and credits the inventory account to reduce its value. This reflects the economic reality that the assets are now worth less than they were previously valued.
The self-check question asks about the firm's accounting profit which can be calculated by subtracting the total costs from the sales revenue. In this case, the firm had sales revenue of $1 million and total costs of $950,000 ($600,000 labor + $150,000 capital + $200,000 materials), leaving an accounting profit of $50,000.