Canton Trade Mart has recently had lackluster sales. The rate of inventory turnover has dropped, and the merchandise is gathering dust. At the same time, competition has forced Canton's suppliers to lower the prices that Canton will pay when it replaces its inventory. It is now December 31, 2018, and the net realizable value of Canton's ending inventory is $ 50,000 below what the company actually paid for the goods, which was $270,000. Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of $760,000.a. What accounting action should Canton take in thissituation?b. Give any journal entry required.c. At what amount should the company report Inventory on the balance sheet?d. At what amount should the company report Cost of Goods Sold on the income statement?e. Discuss the accounting principle or concept that is most relevant to this situation.

Canton Trade Mart has recently had lackluster sales. The rate of inventory turnover has dropped, and the merchandise is gathering dust. At the same time, competition has forced Canton's suppliers to lower the prices that Canton will pay when it replaces its inventory. It is now December 31, 2018, and the net realizable value of Canton's ending inventory is $ 50,000 below what the company actually paid for the goods, which was $270,000. Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of $760,000.

a. What accounting action that Canton should take in this situation is inventory write down - from cost to net realizable Value as is prescribed by financial reporting standards.

b. Give any journal entry required.

JOURNAL ENTRY

Dr. Cost of Goods Sold......(270,000 - 50,000)...$220,000

Cr. Inventory...................................................................................$220,000

Being inventory write down of closing inventory to net realizable value at year end.

c. At what amount should the company report Inventory on the balance sheet?

Net Realizable Value of $50,000

d. At what amount should the company report Cost of Goods Sold on the income statement?

Cost of Goods Sold had a previous account balance of $760,000 and will now include the inventory write down of $220,000 making $980,000

e. Discuss the accounting principle or concept that is most relevant to this situation.

International Accounting Standard 2 (IAS 2) stipulates that inventory should be carried at the lower of Cost or Net Realizable Value

jepessoa jepessoa · Answer 2 · 2020-04-04T23:14:08+02:00

Answer:

a. What accounting action should Canton take in thissituation?

the inventory value must decrease by $50,000 (report inventory at net realizable value)

b. Give any journal entry required.

Dr Cost of goods sold 50,000
Cr Merchandise Inventory 50,000

c. At what amount should the company report Inventory on the balance sheet?

$220,000 (net realizable value)

d. At what amount should the company report Cost of Goods Sold on the income statement?

COGS = $810,000

e. Discuss the accounting principle or concept that is most relevant to this situation.

Conservatism principle states that expenses and liabilities must be recorded immediately.