Question

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete

physical inventory at year-end. A physical count was taken on December 31, 2021, and the inventory on-hand at
that time totaled $50,000, which reflects historical cost. Record the adjusting entry for properly recognizing
2021 Cost of Goods Sold. Hint: This was the first year of operations, so beginning inventory balance is zero.


Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level.
A review of inventory data further indicated that the current retail sales value of the ending inventory is $45,000 and estimated costs of
completion and shipping is 10% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory
using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting
for adjustments of inventory to market value.

Answer 1

Based on the information provided, the following adjusting entry can be recorded to properly recognize the 2021 Cost of Goods Sold and value the ending inventory using the Loss and Allowance methodology:

1. Adjusting entry to recognize Cost of Goods Sold:

Debit: Cost of Goods Sold

Credit: Inventory (reflecting historical cost of $50,000)

1. Adjusting entry to value ending inventory at lower of cost and net realizable value:

Debit: Inventory (to adjust to net realizable value)

Credit: Allowance for Inventory Loss (to reflect the estimated loss in value)

The amounts for the debit and credit should be calculated based on the estimated cost of completion and shipping, which is 10% of retail sales value ($45,000), and the historical cost of the inventory ($50,000). The exact amounts will depend on the specific numbers involved in the calculation.

It's important to note that the Loss Method is used for Income Statement presentation purposes, as per GAAP, for adjustments of inventory to market value. This means that the loss in value of inventory is recognized in the Income Statement as an expense, specifically under the Cost of Goods Sold account, in the period it is identified, rather than creating a separate contra-account for inventory write-downs.