Question
Glenmore Stores uses a perpetual inventory system and applies IAS 2, measuring inventory item by item at the lower of cost and net realizable value. Write-downs and reversals of write-downs are recorded in Cost of Goods Sold, adjusting the Inventory account directly. At December 31, 2025 its inventory consisted of:
| Item | Cost | Net Realizable Value |
|---|
| Alpine Jackets | 12,000 | 10,500 |
| Trail Boots | 8,000 | 8,600 |
| Summit Tents | 15,000 | 13,200 |
Subsequent events:
- On June 30, 2026, improved demand raised the net realizable value of the Summit Tents (all still on hand) to $14,500. IAS 2 requires a previous write-down to be reversed to the extent of the increase, but never above original cost.
- On September 10, 2026, all of the Alpine Jackets were sold for $11,000 cash.
Instructions:
- Prepare the December 31, 2025 entry to write the inventory down to the lower of cost and net realizable value (item-by-item basis).
- Prepare the June 30, 2026 entry to record the reversal of the write-down on the Summit Tents.
- Prepare the entries on September 10, 2026 to record the sale of the Alpine Jackets and the related cost of goods sold at their carrying amount.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 1 — accrual basis of accounting
Adjusting entries exist to move revenue and expense into the period they belong to, regardless of when cash moved. Every adjusting entry touches at least one income statement account and one balance sheet account — and never the cash account, because the cash has either already moved or has not moved yet.
Common mistakes
- Debiting or crediting Cash in an adjusting entry — a reliable sign the entry is wrong.
- Adjusting for the full amount of a prepayment rather than only the expired portion.
- Missing accrued items entirely because no document prompted them — accrued interest and accrued wages are the usual casualties.
Further readingThe 5 types of adjusting entry