Late in December, the next generation of multiuse (MU II) watches is released. In addition to all of the features of the MU watch, the MU II watches are equipped with a global positioning system (GPS) and have the ability to download and play songs and videos off the Internet. The demand for the original MU watches is greatly reduced. As of December 31, the estimated net realizable value of MU watches is only $102 per watch. Suzie uses a FIFO perpetual inventory system to account for inventory.
a. Record any necessary adjusting entry on December 31, 2028, related to this information, assuming Suzie uses a FIFO perpetual inventory system to account for inventory.
b. For what amount would MU inventory be reported in the December 31, 2028, balance sheet?
c. Prepare an updated gross profit section of a partial income statement accounting for this additional information.
Answer (2)
We recorded an adjusting entry to write down the inventory of MU watches by $21,000 due to their decreased net realizable value. The updated balance sheet will report MU inventory at $102,000, and the revised gross profit after the write-down leads to a total of $142,000. Accurate inventory valuation is essential for reflecting true financial health.
;
The adjusting entry debits Cost of Goods Sold and credits Inventory for $15 , 464 .
The MU inventory reported on the balance sheet is calculated by subtracting the write-down from the original inventory value: $123 , 000 − $15 , 464 = $107 , 536 .
The updated Cost of Goods Sold is calculated by adding the write-down to the original Cost of Goods Sold: $123 , 000 + $15 , 464 = $138 , 464 .
The updated Gross Profit is calculated by subtracting the updated Cost of Goods Sold from Sales Revenue: $286 , 000 − $138 , 464 = $147 , 536 .
Explanation
Understanding the Problem We are given that the estimated net realizable value of MU watches is $102 per watch as of December 31, 2028. Suzie uses a FIFO perpetual inventory system. We need to record any necessary adjusting entry, determine the amount MU inventory would be reported in the balance sheet, and prepare an updated gross profit section of the income statement.
Analyzing the Write-Down First, we need to determine if a write-down is necessary. The initial inventory value before adjustment is $123,000, and the cost of goods sold is adjusted by $15,464. This adjustment reflects the write-down of inventory to its net realizable value.
Adjusting Entry a. The adjusting entry is already provided. It debits Cost of Goods Sold and credits Inventory for $15,464. This entry reflects the reduction in the value of the inventory to its net realizable value.
Inventory on Balance Sheet b. To determine the amount MU inventory would be reported in the December 31, 2028, balance sheet, we subtract the write-down from the original inventory value: $123 , 000 − $15 , 464 = $107 , 536 Therefore, the MU inventory would be reported at $107,536 on the balance sheet.
Updated Gross Profit Section c. To prepare the updated gross profit section of the income statement, we need to consider the impact of the write-down on the cost of goods sold. Original Sales Revenue: $286,000 Original Cost of Goods Sold: $123,000 Write-down (Increase in Cost of Goods Sold): $15,464 Updated Cost of Goods Sold: $123 , 000 + $15 , 464 = $138 , 464 Updated Gross Profit: $286 , 000 − $138 , 464 = $147 , 536 Therefore, the updated gross profit is $147,536.
Examples
Consider a clothing store that orders a large quantity of summer dresses. If a new fashion trend emerges unexpectedly before the store can sell all the dresses, the dresses' market value may decrease significantly. The store must then write down the value of the dresses to reflect their current market price. This ensures that the financial statements accurately represent the store's financial position, preventing an overstatement of assets and providing a more realistic view of profitability.
