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Sir, good day
I’m so confused about the question 195 (not sure if my BPP version is same as yours), and the question title is Tunshill Co(Dec10) OTQ case.
The question asked to show the accounting entry for the change in inventory value for the year ended 30 September 20X3.
The value of Tunshill Co’s inventory at 30 September 20X3 on the FIFO basis, is $20 million, however on the AVCO basis it would be valued at $18 million.
I understand that we should credit inventory to reduce the value of inventory but why we should debit cost of sales? Would you please explain for me. Thank you so much!!Hi,
Inventory is a year-end adjustment and so they will have recorded the inventory at the $20 million. The journal entry is to record the inventory on the SFP (DR Inventory), thus recording the asset, and then recording closing inventory in cost of sale on the SPL (CR Closing inventory – C’o’S), thus reducing the cost of sales as the goods will be sold next year.
To reduce the inventory from $20 million to $18 million then we need to reduce the inventory on the SFP (CR Inventory) and the closing inventory figure within cost of sales (DR Closing inventory – C’o’S).
Effectively we are reversing out a portion of what was originally recorded.
Hope that clears it up for you.
Thanks
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