Some of E and S Electronics's merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is $ 22,000 below the business's cost of the goods, which was $ 100,000. Before any adjustments at the end of the period, the company's Cost of Goods Sold account has a balance of $ 390,000. Requirements:
1. Journalize any required entries.
2. At what amount should the company report merchandise inventory on the balance sheet?
3. At what amount should the company report cost of goods sold on the income statement?
4. Which accounting principle or concept is most relevant to this situation?

Explanation:

1. The journal entry has been attached.

2. The company report merchandise inventory on the balance sheet as:

= $100,000 - $22,000

= $78,000

This is because, when using the market value method, it should be noted that the inventories will be written down to their market value when it is is lower than inventory cost and in situations whereby the market value is higher than inventory cost, there will be no effect given.

3. The company should report cost of goods sold on the income statement as:

= $390000+$22000

= $412,000

4. The accounting principle of conservatism is used here. Conservatism is a policy whereby companies predict possible future losses but they do not anticipate the future gains. It is used by companies on order to play safe. This can be seen here as we wrote down the inventory value when market value is lower than inventory cost.

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