question archive At the end of the 2016 accounting period DeYoung Company determined that the market value of its inventory was $79,800
At the end of the 2016 accounting period DeYoung Company determined that the market value of its inventory was $79,800
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At the end of the 2016 accounting period DeYoung Company determined that the market value of its inventory was $79,800. The historical cost of this inventory was $81,400. DeFazio uses the perpetual inventory method. The entry necessary to reduce the inventory to the lower of cost or market will
a. decrease assets and decrease net income.
b. increase assets and increase net income.
c. decrease assets, gross margin, and net income.
d. decrease assets and decrease gross margin.
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Answer: a. decrease assets and decrease net income.
Inventories should be valued at the lower of cost and net realizable value. Thus, to record the decrease in the value of inventories, the entry would include:
| Cost of Goods Sold (81,400-79,800) | 1,600 | |
| Inventory | 1,600 | |
| To record the change in market value. |
The entry provided would result in decrease in assets and net income.
