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Trade Mart has recently had lackluster sales. The rate of inventory turnover has? dropped, and the merchandise is gathering dust. At the same time, competition has forced AquariumAquarium's suppliers to lower the prices that Aquarium will pay when it replaces its inventory. It is now December 31, 2016, and the current replacement cost Aquarium's ending inventory is $75,000 below what Aquarium actually paid for the goods, which was $200,000.
Before any adjustments at the end of the? period, the Cost of Goods Sold account has a balance of $820,000.
Requirements:
a. What accounting action should Aquarium take in this situation?
b. Give any journal entry required.
c. At what amount should Aquarium report Inventory on the balance? sheet?
d. At what amount should the company report Cost of Goods Sold on the income? statement?
e. Discuss the accounting principle or concept that is most relevant to this situation.

Answer :

jepessoa

Answer:

a. What accounting action should Aquarium take in this situation?

the balance of inventory account should decrease to match the replacement cost.

b. Give any journal entry required.

Dr Cost of goods sold 75,000

    Cr Inventory 75,000

c. At what amount should Aquarium report Inventory on the balance? sheet?

Inventory = $200,000 - $75,000 = $125,000

d. At what amount should the company report Cost of Goods Sold on the income statement?

Cost of goods sold = $820,000 + $75,000 = $895,000

e. Discuss the accounting principle or concept that is most relevant to this situation.

US GAAP states that companies must use the lower of cost or market rule, which means that inventory must be recognized at the lowest cost either original purchase cost or market value.

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