Answer to Question #194141 in Accounting for Thabisile Ndabambi

Question

On 28 December 2020, the net realisable value of trading stock bought on 2 December 2020 was R100 000. A write down of R5 000 was approved but not yet processed.

Recognise in the general journal

Answer 1

Solution:

Net Realizable Value (NRV), is the amount of cash a company expects to receive based on the ensuing sale or disposal of an item after deducting any related costs.

NRV = Sales – Costs

The initial journal entry for NRV of trading stock as of 28^th December 2020 is as follows:

                                                               Dr.                                Cr.

Trading Stock                                      100,000

       Unrealized gain                                                                100,000

(To record the expected cash when trading stock is finally sold)

 

An inventory write-down is an accounting procedure used to record the decrease of an inventory’s value and it is a requirement when the inventory’s market value falls below its book value on the balance sheet.

A write-down of R5,000, which was approved but not processed will be recorded using the following two journal entry methods:

1.). Using inventory and cost of goods sold:

                                                                        Dr.                                          Cr.

Cost of goods sold                                      5,000

       Inventory                                                                                                5,000

(To adjust end-year inventory to net realizable value)

2.). Using a contra-asset account and cost of goods sold:

                                                                        Dr.                                          Cr.

Cost of goods sold                                      5,000

       Allowance to reduce inventory to NRV                                                5,000

(To adjust end-year inventory to net realizable value)