Question

T. J. Jackson Supplies had merchandise inventory that cost \(1,300. The market value of the merchandise inventory is \)750

.

What value should Jackson Supplies show on the balance sheet for merchandise inventory? Record the adjusting entry, if one is needed.

Short answer

The adjustment entry would be made for $550.

Step-by-step solution

Lower cost or market value rule

Inventory valuation is based on two approaches. One approach is related to the computation of ending inventory and COGS based on cost flow assumption. The second approach is to apply the conservative principle by matching the computed cost with the market cost.

The inventory would always be reported on the balance sheet at the lower of cost or market value.

If the market value is lower than the cost then the necessary adjustment would be made with the difference amount.

Adjustment entry

$\begin{array}{c}\mathbf{A}\mathbf{d}\mathbf{j}\mathbf{u}\mathbf{s}\mathbf{t}\mathbf{m}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{}\mathbf{a}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{=}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{M}\mathbf{a}\mathbf{r}\mathbf{k}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{300}\mathbf{-}\mathbf{\$}\mathbf{750}\\ \mathbf{=}\mathbf{\$}\mathbf{550}\end{array}$

	Journal entry
Date	Description	Debit	Credit
	Cost of goods sold	$550
	Merchandise Inventory		$550
	Being inventory is adjusted for the lost value