Question

Sandork, Inc., has 200 units of inventory which are currently priced $4.90 per unit at the market. Originally this inventory cost $5.50 per unit from an order of 400. Sandork, Inc., should take what following step?

		Loss on inventory write-down       120 Inventory                                                         120
		Loss on inventory write-down     240 Inventory                                                       240
		Inventory                                       240 Loss on inventory write-down                             240
		Inventory                                     120 Loss on inventory write-down                             120
		Make no entry.

Answer 1

In order to be able to answer the question, we have to understand the first basic rule about inventory valuation.

Inventory is always value at Cost price or NRV (Net realizable value) whichever is lower. This is because inventory is held by the company with an unseen future and the company does not know when it will be able to sell such Inventory. Therefore if the NRV of inventory is lower than it's cost, we need to write down the inventory to NRV in order to depict a true & fair picture.

In the current case, cost of inventory = 200 units * 5.5 $ per unit = 1,100 $ per unit.

NRV = 200 units * 4.9 $ per unit = 980 $ per unit.

Hence Sandork, Inc needs to write down/reduce the inventory by 120 $ and recognize a loss for the same.

Hence the entry to be passed is as follows :

Option A : Loss on Inventory write down ..Dr 120

To Inventory 120