Nutritional Foods reports merchandise inventory at the lower of the cost or mark

Question

Nutritional Foods reports merchandise inventory at the lower of the cost or market. Prior to releasing its financial statements for the year ended March 31,2015, Nutritional's preliminary income statement, before the year end adjustments is as follows:

Sales revenue           $121000

Cost of goods sold    $49000

Gross Profit               $72000

Nutritional has determined that the current replacement cost of ending merchandise inventory is $16000. Cost is $21000.

1. Journalize the adjusting entry for merchandise inventory, if any is required.

2. Prepare a revised partial income statement to show how Nutritional Foods should report sales, cost of goods sold, and gross profit.

Explanation / Answer

1. Journalize the adjusting entry for merchandise inventory, if any is required.

Cost of good sold A/c Dr $5000

To Merchandise Inventory $5000

(Being Stock is to be value at market or cost whichever is lower, hence adjustment entry for stock)

2. Prepare a revised partial income statement to show how Nutritional Foods should report sales, cost of goods sold, and gross profit.

Sales revenue           $121000

Cost of goods sold    $54000

Gross Profit               $67000

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