At December 31, Hardball Company has ending inventory with a historical cost of

Question

At December 31, Hardball Company has ending inventory with a historical cost of $316,000 an the company uses the perpetual inventory system. The current replacement cost of the ntory is $306,500 with a net realizable value is $325,000. The normal profit on this inventory is $25,000. Before any adjustments at the end of the period, the cost of goods sold account has a balance of $450.000. Which of the following journal entries is required on December 31 to adjust the ending balance of inventory if the direct method is used to record the lower of cost or market write down? O Cost of Goods Sold $9,000 $9,000 Inventory Inventory Cost of Goods Sold $9,000 $9,000 O Cost of Goods Sold $9,500 $9,500 Inventory Loss on inventory write down Inventory $9,500 $9,500

Explanation / Answer

Under the Direct method of perpetual inventory, the cost of NRV which ever is lower is uded to value the inventory.

Replacement Cost of NRV(LOwer) = 3,06,500

Therefore Inventory must be written down by 3,16,000- 3,06,500

= $9,500

Journal Entry :

Cost of goods sold ------------------------------------ $ 9,500

Inventory ----------------------------------------------------------$9,500

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