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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjusting entry for merchandise inventory shrinkage

Paragon Tire Co. ‘ s perpetual inventory records indicate that $2,780,000 of merchandise should be on hand on March 31, 2016. The physical inventory indicates that $2,734,800 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Paragon Tire Co. for the year ended March 31, 2016.

To determine

Inventory Shrinkage: It represents the loss of inventory. In other words, it refers to the difference between the amount of inventory shown in the accounting records and the actual inventory. The difference indicates the issues with the inventory caused due to lost, theft, clerical errors, damaged goods or spoilage.

To Record: The adjusting entry for inventory shrinkage.

Explanation
  • Cost of merchandise sold is an expense account and it decreases the value of equity by $45,200. Therefore, debit cost of merchandise sold account with $45,200.
  • Merchandise inventory is an asset and it is decreased by $45,200. Therefore, credit merchandise inventory account with $45,200.

Working Note:

Calculate the inventory shrinkage.

Unadjusted merchandise inventory = $2,780,000

Physical count of inventory = $2,734,800

Inventory 

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