Calculate the inventory depreciation expense for July using a 25% depreciation rate.
| (in $000) | Begin Inv. | Purchases | COGS |
|---|---|---|---|
| June | 70 | 30 | 40 |
| July | 60 | 10 | 50 |
| August | 20 | 50 | 30 |
Answer (2)
Calculate the ending inventory for July: Ending Inventory = Beginning Inventory + Purchases - COGS = $60,000 + $10,000 - $50,000 = $20,000.
Calculate the depreciation expense for July: Depreciation Expense = Depreciation Rate * Ending Inventory = 0.25 * $20,000 = $5,000.
The inventory depreciation expense for July is $5 , 000 .
Explanation
Understanding the Problem We are given the beginning inventory, purchases, and cost of goods sold (COGS) for July, all in thousands of dollars. We also know the depreciation rate is 25%. Our goal is to calculate the inventory depreciation expense for July.
Calculating Ending Inventory First, we need to determine the ending inventory for July. The formula for ending inventory is:
Ending Inventory = Beginning Inventory + Purchases - COGS
Applying the Formula Using the values provided in the table for July:
Beginning Inventory = $60,000 Purchases = $10,000 COGS = $50,000
Plugging these values into the formula:
Ending Inventory = $60,000 + $10,000 - $50,000 = $20,000
Calculating Depreciation Expense Next, we calculate the depreciation expense for July using the depreciation rate of 25%.
Depreciation Expense = Depreciation Rate × Ending Inventory
Depreciation Expense = 0.25 × $20,000 = $5,000
Final Answer Therefore, the inventory depreciation expense for July is $5,000.
Examples
Inventory depreciation is a common concept in accounting. For example, a clothing store might use depreciation to account for seasonal items that lose value over time. If a store has $20,000 worth of unsold summer clothes at the end of July and applies a 25% depreciation rate, they would write off $5,000 as depreciation expense. This helps the store accurately reflect the value of its inventory on its balance sheet and make informed decisions about pricing and purchasing.
The inventory depreciation expense for July is calculated by first finding the ending inventory, which amounts to $20,000. Then, applying the 25% depreciation rate results in a depreciation expense of $5,000. Thus, the final expense is $5,000.
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