Burlington Garden Supplies uses a perpetual inventory system. Burlington Garden

Question

Burlington Garden Supplies uses a perpetual inventory system. Burlington Garden Supplies has these account balances at August 31, 2016, prior to making the year-end adjustments BClick the icon to view the account balances) A year ago, the replacement cost of ending inventory was $12,600, which exceeded the cost of $12,000. Burlington Garden Supplies has determined that the replacement cost of the August 31, 2016, ending inventory is $11,500 Requirement 1. Prepare Burlington Garden Supplies' 2016 income statement through gross profit to show how the company would apply the lower-of-cost-or-market rule to its inventories Burlington Garden Supplies Income Statement (partial) Year Ended August 31, 2016 Gross proft Data Table Inventory 12,000 15,000 Cost of Goods Sold Sales Revenue Beg ba End bal Bal 72,000 Bal 116,000

Explanation / Answer

Inventory is valued ate lower of cost or market value. In this case market value is lower than the cost. Hence follwing entry will be passed to value invenotry at market value

Cost of Goods sold(15000-11500) Dr 3500

To Inventory A/c 3500

This will increase COGS from 72000 to 75500 thereby reducing gross profit

Sales 116000 Cost of Goods sold (72000+(15000-11500)) 75500 Gross Profit 40500

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