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ACCA Applied Knowledge · Financial Accounting · Inventories

Marlow Co uses the perpetual inventory system. It returns goods costing $5,000 (purchased on credit) to a supplier because they were faulty. Separately, it writes down other inventory by $2,000 to net realisable value. Which pair of entries is correct?

The purchase return debits trade payables and credits inventory by $5,000, reducing both the liability and the asset. The NRV write-down debits cost of sales and credits inventory by $2,000, recognising the loss as an expense.

  1. ADr Trade payables $5,000, Cr Inventory $5,000; Dr Cost of sales $2,000, Cr Inventory $2,000Correct
  2. BDr Inventory $5,000, Cr Trade payables $5,000; Dr Cost of sales $2,000, Cr Inventory $2,000
  3. CDr Trade payables $5,000, Cr Inventory $5,000; Dr Inventory $2,000, Cr Cost of sales $2,000
  4. DDr Trade payables $5,000, Cr Cost of sales $5,000; Dr Inventory $2,000, Cr Revenue $2,000

Explanation

Returning goods reduces the liability to the supplier and the inventory held. The NRV write-down is an expense, so debit cost of sales and credit inventory. Option 2 reverses the return, and option 3 would increase inventory for the write-down.

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