On April 1, a company purchased two units of Inventory, A and B. The cost of...

Solution :

As per the information given in the question we have

Unit A:

Cost = $ 625   ; Net realizable value = 650

Lower of cost and realizable value for Unit A is its cost.

Thus Unit A has been correctly recorded at a cost of $ 625.

No adjustment entry is required for the same.

Unit B:

Cost = $ 565   ; Net realizable value = 475

Lower of cost and realizable value for Unit B is its Net Realizable value.

Hence the Inventory cost of Unit B has to be lowered by ( $ 565 - $ 475 ) = $ 90

( In order to give effect to the adjustment for lower of cost or net realizable value on April 30 )

The adjustment entry that is to be passed for the same is

Crediting the Inventory account with $ 90 and making a corresponding debit to the Cost of goods sold account with $ 90

Thus the adjustment entry is

Cost of Goods Sold         $ 90

           Inventory                        $ 90

Thus the solution is Option 3.