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Inventory at 31 October 20X6 was valued at $275,000 based on its original cost. However, $45,000 of this inventory has been in the warehouse for over two years and the directors have agreed to sell it in November 20X6 for a cash price of S20,000. The administrative expenses include $5,000 which relates to November 20X6. The allowance for receivables is to be increased to the equivalent of 5% of trade receivables.
There are wages and salaries outstanding of $40,000 for the year ended 31 October 20X6.
Will the following items be debited or credited to profit for the year?
(1) Inventory valuation adjustment
(2) Administrative expenses relating to November 20X6
(3) Increase in allowance for receivables
(4) Outstanding wages and salaries
I’m not sure why the answers are : DR, CR, DR, DR
My ideas are: inventory value had been decreased,: 275,000-45,000+20,000, so decrease inventory is CR, why the answer is DR?
and Administrative expenses is to DR, why the answer is CR?
Isn’t increase in allowance for receivables to CR, why the answer is DR?
Outstanding wages and salaries is liability, liability increase isnt to CR, why the answer is DR?The question asks for the entries to the profit account.
When we debit the profit account we are reducing the profit, and when we credit the profit account we are increasing the profit.
So, for example, for outstanding wages we credit the wages account with the amount owing, and debit the profit account (because it means less profit).
The same logic applies to the other adjustments.
Have you watched my free lectures showing all double entries? The lectures are a complete free course for Paper FA and cover everything needed to pass the exam well.
Dear Mr. Moffat, the sales are made after the year end, so what are the reasons to make sure that the adjusment had to be made at year end?
Because the sale is not made during the year, it is not recorded this year.
However because the inventory is valued at the lower of cost and net realisable value, it does affect that valuation of the inventory.
Have you watched all of my free lectures? They are a complete free course for Paper FA and cover everything needed to be able to pass the exam well 🙂
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