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Horngren'S Financial And Managerial Accounting
Found in: Page 296

Short Answer

Jeana’s Furniture’s unadjusted Merchandise Inventory account at year-end is $69,000. The physical count of inventory came up with a total of $67,600. Journalize the adjusting entry needed to account for inventory shrinkage.


Inventory shrinkage expense for the company is $1,400.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Inventory Shrinkage

In accounting, inventory shrinkage refers to the loss arising from the differences in the actual inventory balances and reported inventories in the books of accounts. Such a loss is reported in the books of accounts of all the business entities to reflect the accurate inventory balances.

Step 2: Recording of inventory shrinkage


Accounts and Explanation

Debit ($)

Credit ($)

Inventory shrinkage expenses


Merchandise inventory


(To record the inventory shrinkage)

Step 3: Computation of inventory shrinkage expenses

Most popular questions for Business-studies Textbooks

Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:


Income Statement

Year Ended December 31, 2017

Net Sales Revenue $350,000

Cost of Goods Sold 210,000

Gross Profit 140,000

Operating Expenses:

Selling Expense 40,000

Administrative Expense 25,000

Net Income $75,000

Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to $100,000 during 2018.

a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing $20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.

b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for $40 each; Party-Time can mark these dresses up 100% and sell them for $80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.

Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.


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