The following information pertains to Deal Corp.'s cost of goods sold:
Inventory, 1/1 $ 90,000
Purchases 124,000
Write-off of obsolete inventory 34,000
Inventory, 12/31 30,000
The inventory written off became obsolete due to an unexpected and unusual technological advance by a competitor. In its income statement, what amount should Deal report as cost of goods sold?
a. $218,000
b. $150,000
c. $184,000
d. $124,000
Choice “b” is correct. The cost of goods sold is calculated as follows:
90,000 Inventory, 1/1
+124,000 Purchases
= 214,000 Goods available
– (34,000) Obsolete inventory
– (30,000) Inventory, 12/31
= 150,000 Cost of goods sold
The write-off of obsolete inventory is treated as an operating loss and not as cost of goods sold. [BUT BY VIRTUE OF SUBRACTING IT LIKE THIS ISN'T THAT EXACTLY WHAT'S HAPPENING? SHOULDN'T THE COGS BE $184,000 AND THE $34,000 SHOULD BE TREATED AS A TOTALLY SEPRATE EXPENSE?]
Choice “a” is incorrect. The $34,000 write off of inventory is subtracted, not added to inventory.
Choice “c” is incorrect. Obsolete inventory is not included in cost of goods sold. It is deducted from inventory and included in unusual gains or losses on the income statement. Total reduction in inventory is $184,000, but $34,000 is not included in cost of goods sold.
Choice “d” is incorrect. Purchases reflect costs of goods sold on a cash basis, not on an accrual basis.
.