Calculate the inventory depreciation expense for August using a 25% depreciation rate.
| | Begin Inv. | Purchases | COGS |
| :----- | :---------- | :-------- | :--- |
| June | 70 | 30 | 40 |
| July | 60 | 10 | 50 |
| August | 20 | 50 | 30 |
Answer (1)
10000
Explanation
Understanding the Problem We are given the beginning inventory, purchases, and cost of goods sold (COGS) for August, as well as the depreciation rate. We need to calculate the inventory depreciation expense for August.
Calculating Ending Inventory First, we need to calculate the ending inventory for August. The formula for ending inventory is:
Ending Inventory = Beginning Inventory + Purchases - COGS
For August, we have: Beginning Inventory = $20,000 Purchases = $50,000 COGS = $30,000
So, the ending inventory for August is:
Ending Inventory = $20,000 + $50,000 - $30,000 = $40,000
Calculating Depreciation Expense Next, we calculate the depreciation expense for August. The depreciation rate is 25%, so we multiply the ending inventory by 0.25:
Depreciation Expense = Ending Inventory × Depreciation Rate Depreciation Expense = 40 , 000 \times$ 0.25 = $10,000
Final Answer Therefore, the inventory depreciation expense for August is $10,000.
Examples
Inventory depreciation is a crucial concept in accounting and business management. For example, a clothing store needs to account for seasonal items that may decrease in value over time. By calculating depreciation, the store can accurately reflect the value of its inventory on its balance sheet and make informed decisions about pricing and inventory management. This ensures the store's financial statements provide a realistic view of its assets and profitability.
