Question

Bonnie Denim Company sells blue jeans. Last year, skinny jeans were fashionable; this year, relaxed-fit jeans are in style. The company has 545 units of skinny jeans with a cost of $26 per unit and a market value of $24 per unit. The inventory also includes 1,170 units of relaxed-fit jeans with a cost of $24 per unit and a market value of $28 per unit. Required: Prepare the journal entry, if any, that is required to adjust the Inventory account. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

Answer:

Debit Inventory write-off (p/l)   $1,090

Credit Inventory account          $1,090

Explanation:

According to IAS 2 inventories which is the accounting standard for Inventories under IFRS, Inventory should initially be recognized at the cost (which includes the cost of the item and other associated cost such as freight).

However, it is required that subsequently, inventory would be measured at the lower of cost or net realizable value.

When the cost is higher than the net realizable value, the cost of the inventory will be written down by

Debit Inventory write-off (p/l), credit Inventory

Item                         cost     net realizable value     new carrying amount

skinny jeans            $26          $24                                  $24

relaxed-fit jeans      $24           $28                                  $24

From above, no adjustment is required for relaxed-fit jeans as the cost is lower than the realizable amount.

Adjustments for skinny jeans

=($26 - $24) * 545

= $1,090