Calculate the inventory depreciation expense for June 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 June: E n d in g I n v e n t ory = B e g innin g I n v e n t ory + P u rc ha ses − COGS = 70 + 30 − 40 = 60 .
Calculate the depreciation expense for June: De p rec ia t i o n E x p e n se = E n d in g I n v e n t ory × De p rec ia t i o n R a t e = 60 × 0.25 = 15 .
The depreciation expense for June is 15 (in thousands of dollars).
The final answer is 15 .
Explanation
Understanding the Problem We are given the beginning inventory, purchases, and cost of goods sold (COGS) for June. We also know the depreciation rate is 25%. Our goal is to calculate the inventory depreciation expense for June.
Calculating Ending Inventory First, we need to calculate the ending inventory for June. The formula for ending inventory is: E n d in g I n v e n t ory = B e g innin g I n v e n t ory + P u rc ha ses − COGS
Applying the Formula Using the given values for June: E n d in g I n v e n t ory = 70 + 30 − 40 = 60
Calculating Depreciation Expense Now that we have the ending inventory, we can calculate the depreciation expense for June. The formula for depreciation expense is: De p rec ia t i o n E x p e n se = E n d in g I n v e n t ory × De p rec ia t i o n R a t e
Applying the Formula Using the ending inventory and the given depreciation rate of 25%: De p rec ia t i o n E x p e n se = 60 × 0.25 = 15
Final Answer Since the values are in thousands of dollars, the depreciation expense is $15,000.
Examples
Inventory depreciation is a common concept in accounting. For example, a clothing store might depreciate its inventory at the end of a season to reflect the fact that the clothes are no longer in style and therefore worth less. Calculating depreciation helps businesses accurately reflect the value of their assets and manage their finances effectively. This ensures that financial statements provide a true and fair view of the company's financial position.
The inventory depreciation expense for June is $15,000, calculated from the ending inventory of $60,000 and applying a 25% depreciation rate. First, we determined the ending inventory and then used that to find the depreciation expense. This reflects how much the inventory has depreciated in value over that month.
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