Saltwater 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 Saltwater’s suppliers to lower the prices that Saltwater will pay when it replaces its inventory.
It is now December 31, 2012, and the current replacement cost of Saltwater’s ending inventory is $85,000 below what Saltwater actually paid for the goods, which was $270,000. Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of $790,000.
a. What accounting action should Saltwater take in this situation?
b. Give any journal entry required.
c. At what amount should Saltwater 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.