At the end of its accounting year, Guild Corp.\'s physical inventory count indic

Question

At the end of its accounting year, Guild Corp.'s physical inventory count indicated that 540,000 units of inventory, costing $1.50 each, were on hand. The company's perpetual inventory system reported a balance of $817,200. The year end adjusting entry is

a) debit Inventory and credit Loss on Inventory Due to Count, $7,200.

b) debit Loss on Inventory Due to Count and credit Inventory, $7,200.

c) debit Inventory and credit Loss on Inventory Due to Count, $277,200.

d) debit Loss on Inventory Due to Count and credit Inventory, $277,200.

Explanation / Answer

Perpetual inventory system, reported that inventory balance is $817,200. But, physical count of inventory indicated that only 540,000units of inventory is there in hand at the end of the year. Hence, the amount of inventory in hand, at the end of the accounting year is $810,000 (540,000 * $1.50 each). Now, to reduce the inventory balance from $817,200 to $810,000, Guild Corp. must reduce its inventory balance by $7,200.

Hence, the answer is:

b) Debit loss on inventory due to count and credit inventory, $7,200.

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