Question
Harvest Lane Foods measures inventories at the lower of cost and net realizable value, applied item by item (IAS 2), and records write-downs directly against Inventory with the loss in Cost of Goods Sold. At December 31, 2025 its inventory was:
| Item | Cost | NRV at Dec 31, 2025 |
|---|
| Flour | $12,000 | $11,200 |
| Sugar | 9,000 | 9,400 |
| Cooking Oil | 15,000 | 13,700 |
| Spices | 6,000 | 6,300 |
By March 31, 2026 none of the written-down goods had been sold, and market prices had recovered: the NRV of the flour was $12,200 and the NRV of the cooking oil was $14,500. Other items remained above cost.
Required:
- Record the write-down to net realizable value at December 31, 2025 (one entry for the total).
- Record the reversal of the write-down at March 31, 2026 (one entry for the total). Remember that a reversal is limited to the amount of the original write-down, so inventory is never carried above its original cost.
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