Mooncake Company uses the perpetual inventory method.The unadjusted balance in the company's Merchandise Inventory account is $120,000 at December 31,2014.A physical count of its inventory on that date discloses that the cost of the merchandise inventory available is $119,000.How would the company record the adjusting entry relating to the inventory shrinkage at December 31,2104?
A)Debit Merchandise Inventory for $1,000 and credit Cost of Goods Sold for $1,000.
B)Debit Cost of Goods Sold for $1,000 and credit Merchandise Inventory for $1,000.
C)Debit Merchandise Inventory for $1,000 and credit Purchases for $1,000.
D)Debit Purchases Expense for $1,000 and credit Merchandise Inventory for $1,000.
E)Debit for Merchandise Inventory for $1,000 and credit Inventory Shrinkage Expense for $1,000.

Question

Quizplus · Accepted Answer

The adjusting entry for inventory shrinkage would be to debit Cost of Goods Sold for the amount of the shrinkage ($1,000 in this case) and credit Merchandise Inventory for the same amount. This entry reflects the reduction in the inventory value due to shrinkage as an expense on the income statement. Choice A is incorrect because the debit should be to Cost of Goods Sold, not Merchandise Inventory. Choice C is incorrect because the credit should be to Merchandise Inventory, not Purchases. Choice D is incorrect because there is no Purchases Expense account. Choice E is incorrect because there is no Inventory Shrinkage Expense account, and even if there were, it would not be appropriate to use it for this entry since it would not be a separate expense account but rather a component of Cost of Goods Sold.

Mooncake Company Uses the Perpetual Inventory Method