Question

Nutriset Foods reports merchandise inventory at the lower-of-cost-or-market. Prior to releasing its financial statements for the year ended March 31, 2019, Nutriset’s preliminary income statement, before the year-end adjustments, appears as follows:

NUTRISET FOODS

Income Statement (Partial)

Year Ended March 31, 2019

Net Sales Revenue \( 118,000

Cost of Goods Sold 47,000

Gross Profit \) 71,000

Nutriset has determined that the current replacement cost of ending merchandise inventory is \(19,500. Cost is \)24,000.

Requirements

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

Short answer

The adjustment entry would be made by the amount of $4,500.

Step-by-step solution

Step-by-Step-SolutionStep 1: Adjustment as per the Lower-of-cost-or-market approach

As per the LCM approach, if the ending inventory is lower than the market cost then there would be no adjustment and the inventory would be reported at its original cost.

But if the market price is lower than the cost of inventory then the adjustment would be made for the difference amount.

In the given case,

$$\begin{gathered} \mathit{A}\mathit{d}\mathit{j}\mathit{u}\mathit{s}\mathit{t}\mathit{m}\mathit{e}\mathit{n}\mathit{t}\mathit{A}\mathit{m}\mathit{o}\mathit{u}\mathit{n}\mathit{t}\mathbf{=}\mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathit{o}\mathit{f}\mathit{i}\mathit{n}\mathit{v}\mathit{e}\mathit{n}\mathit{t}\mathit{o}\mathit{r}\mathit{y}\mathbf{-}\mathit{C}\mathit{u}\mathit{r}\mathit{r}\mathit{e}\mathit{n}\mathit{t}\mathit{r}\mathit{e}\mathit{p}\mathit{l}\mathit{a}\mathit{c}\mathit{e}\mathit{m}\mathit{e}\mathit{n}\mathit{t}\mathit{c}\mathit{o}\mathit{s}\mathit{t} \\ \mathbf{=}\mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{19}\mathbf{,}\mathbf{500} \\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{500} \end{gathered}$$

Journal entry for adjustment

	Journal entry
Date	Description	Debit	Credit
March 31	Cost of goods sold	$4,500
	Merchandise Inventory		$4,500
	Being loss of inventory value adjusted