LO 3 (Learning Objective 3: Explain GAAP and apply the lower-of-cost-or-market rule to inventories) Freshwater Trade Mart has recently had lackluster sales. The rate of inventory turnover has dropped, and the merchandise is gathering dust. At the same time, competition has forced Freshwater’s suppliers to lower the prices that Freshwater will pay when it replaces its inventory. It is now December 31, 2018, and the net realizable value of Freshwater’s ending inventory is $60,000 below what the company actually paid for the goods, which was $210,000. Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of $820,000. a. What accounting action should Freshwater take in this situation? b. Give any journal entry required. c. At what amount should the company report Inventory on the balance sheet ? d. At what amount should the company report Cost of Goods Sold on the income statement? e. Discuss the accounting principle or concept that is most relevant to this situation.
LO 3 (Learning Objective 3: Explain GAAP and apply the lower-of-cost-or-market rule to inventories) Freshwater Trade Mart has recently had lackluster sales. The rate of inventory turnover has dropped, and the merchandise is gathering dust. At the same time, competition has forced Freshwater’s suppliers to lower the prices that Freshwater will pay when it replaces its inventory. It is now December 31, 2018, and the net realizable value of Freshwater’s ending inventory is $60,000 below what the company actually paid for the goods, which was $210,000. Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of $820,000. a. What accounting action should Freshwater take in this situation? b. Give any journal entry required. c. At what amount should the company report Inventory on the balance sheet ? d. At what amount should the company report Cost of Goods Sold on the income statement? e. Discuss the accounting principle or concept that is most relevant to this situation.
Solution Summary: The author explains that the lower-of-cost-or-market rule states that ending merchandise inventory must be reported in the financial statement of a company.
(Learning Objective 3: Explain GAAP and apply the lower-of-cost-or-market rule to inventories) Freshwater Trade Mart has recently had lackluster sales. The rate of inventory turnover has dropped, and the merchandise is gathering dust. At the same time, competition has forced Freshwater’s suppliers to lower the prices that Freshwater will pay when it replaces its inventory. It is now December 31, 2018, and the net realizable value of Freshwater’s ending inventory is $60,000 below what the company actually paid for the goods, which was $210,000. Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of $820,000.
a. What accounting action should Freshwater take in this situation?
b. Give any journal entry required.
c. At what amount should the company report Inventory on the balance sheet?
d. At what amount should the company report Cost of Goods Sold on the income statement?
e. Discuss the accounting principle or concept that is most relevant to this situation.
Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.
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