Question

Pathep QUESTION 10 Blake offers to sell Travis his cat a Volvo XC90, for $1,000. That night, while the car was parked on the street, it was demolished by another driver who lost control of his car. What is the outcome of the case? Why? TT I Arial 3(121) T EE 25

Answer 1

Assuming that outcome from accounting point of view is asked in the question.

The car was offered for sale at $1,000 that means the net realizable value of the car is $ 1,000.

The car is completely damaged and cannot be sold now, therefore it needs to be removed from the books also by passing the below journal entry.

(1) If we assume that the car was an asset.

Loss on asset Damage                                  $1,000

Car                                                                                          $1,000

(2) If we assume that the car was an inventory

Under periodic inventory system no accounting entry is required as inventory value would be computed at end of reporting period.and as the value of closing stock decreases automatically the cost of goods sold would increase thereby reflecting the impact of loss of damaged goods.

If any amount from insurance company is received, the entry would be:

Cash/Bank

Other income- Insurance compensation