Question

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete
physical inventory at year-end. A physical count was taken on December 31, 2016, and the inventory on-hand at
that time totaled $70,000, which reflects historical cost. Record the adjusting entry for properly recognizing
2016 Cost of Goods Sold. Hint: This was the first year of operations, so beginning inventory balance is zero.
Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level.
A review of inventory data further indicated that the current retail sales value of the ending inventory is $60,000 and estimated costs of
completion and shipping is 10% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory
using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting
for adjustments of inventory to market value.

Answer 1

1. Accounting entry for recognizing Cost of goods sold under Periodic inventory method

The periodic inventory system updates the ending inventory balance in the general ledger when you conduct a physical inventory count. Under the periodic inventory system, all purchases made between physical inventory counts are recorded in a purchases account. When a physical inventory count is done, the balance in the purchases account is then shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory.

The calculation of the cost of goods sold under the periodic inventory system is:

Cost of goods sold = Beginning inventory + Purchases – Ending inventory

In the given question, only the details about the physical inventory at the year-end is provided. We will assume that there is no sales made during the year. Since, this is year 1, beginning inventory is considered as NIL

The accounting entry to transfer the inventory physical count balance from purchase to inventory is-

Inventory Dr 70,000

To Purchases Cr 70,000

2. Accounting entry for recording inventory basis loss allowance methodology

Inventory                            Dr                          70,000  

To Purchases                     Cr                                         70,000

loss from reducing inventory to LCM                                       Dr           16,000  

To allowance to reduce inventory to LCM Cr                          16,000

(Calculation- 70,000 – (60000- (60000*.10)))