Question

At the end of 2017, Dasani Corp. has inventory on its shelves with a book value (historical cost) of $75,000. Dasani believes that it can sell this inventory in the future for a total sales price of $140,000. The current market value of the inventory is determined to be $62,000.

Based on this information, which of the following will Dasani Corp. record as part of its adjusting journal entry for ending inventory?

• ‘Gain on inventory write-up’ of $65,000

• ‘Cost of goods sold’ (or ‘loss on inventory write-down’) of $65,000

• ‘Gain on inventory write-up’ of $13,000

• ‘Cost of goods sold’ (or ‘loss on inventory write-down’) of $13,000

• No adjusting journal entry will be recorded

Answer 1

As per details given in question, dasani corp. is having Inventory on shelves with Historical cost of $75,000 but the Current Market Value of Inventory on Shelves is $62,000. Dasani Corp. beleives that it can sell the inventory n Selves for $140,000.

Dasani Corp. shall record its adjusting journal Entry for edning inventory for "Cost of Goods Sold/ Loss On Inventory Write Down of $13,000" following the Principle of Prudence as defined in US GAAP.

As per the Principle of prudence one should book adjusting entry for all the anticipating Losses but not for anticipating Profits or gains.

This priniciple follows the concpet of bring conservative for recording the assets at the Fair Value.

So in brief, to anticipatre for any loss in Inventory Value, firms should record Inventory at Value which is Lower of Historical cost or the Current Market Value.

Therefore, Dasani Corp.'s beleives to sell the Inventory for $140,000 would be ignored following the concept of Prudence.

And Dasani Corp. will value Inventory on Shelves at lower of $75,000 or $62,000 & will post adjusting Journal entry for ending inventory at Cost of Goods Sold/ Loss On Inventory Write Down of $13,000.