If the replacement cost of inventory is less than its historical cost, the company will write down the inventory by:
A)debiting Cost of Goods Sold and crediting Inventory.
B)debiting Inventory and crediting Cost of Goods Sold.
C)making a note in the financial statements only.
D)debit Inventory for replacement cost, credit Inventory for historical cost.

Question

Quizplus · Accepted Answer

When the replacement cost of inventory is less than its historical cost, it means that the inventory is overvalued on the balance sheet. To adjust the inventory to its lower replacement cost, the company needs to write down the inventory by debiting Cost of Goods Sold and crediting Inventory. This will reduce the inventory value on the balance sheet and recognize the loss in the income statement. Option B is incorrect because it would further inflate the inventory value. Option C is incorrect because a note in the financial statements alone would not adjust the inventory value. Option D is incorrect because it would not recognize the loss in the income statement.

If the Replacement Cost of Inventory Is Less Than Its