Calculate the inventory depreciation expense for July using a 15% depreciation rate.
| (in $000) | Begin Inv. | Purchases | COGS |
|---|---|---|---|
| June | 60 | 20 | 50 |
| July | 30 | 30 | 40 |
| August | 20 | 60 | 40 |
Answer (2)
3000
Explanation
Understanding the Problem We are given the beginning inventory, purchases, and COGS (Cost of Goods Sold) for July, and we need to calculate the inventory depreciation expense for July using a 15% depreciation rate.
Calculating Ending Inventory First, we need to calculate the ending inventory for July. The formula for ending inventory is:
Ending Inventory = Beginning Inventory + Purchases - COGS
Applying the Formula Using the data from the table for July:
Beginning Inventory = $30,000 Purchases = $30,000 COGS = $40,000
So, the ending inventory for July is:
E n d in g I n v e n t ory = 30 , 000 + 30 , 000 − 40 , 000 = 20 , 000
Calculating Depreciation Expense Next, we calculate the depreciation expense for July using the 15% depreciation rate.
Depreciation Expense = Ending Inventory * Depreciation Rate
De p rec ia t i o n E x p e n se = 20 , 000 ∗ 0.15 = 3 , 000
Final Answer Therefore, the inventory depreciation expense for July is $3,000.
Examples
Inventory depreciation is a crucial concept in accounting. For example, if a store has perishable goods like fruits, vegetables, or electronics that become obsolete quickly, calculating depreciation helps the store accurately reflect the value of its inventory over time. This ensures that financial statements provide a realistic view of the company's assets and profitability, aiding in making informed business decisions such as pricing, purchasing, and storage strategies. By understanding and applying depreciation calculations, businesses can manage their inventory more effectively and maintain financial health.
The inventory depreciation expense for July is calculated to be $3,000 after determining the ending inventory as $20,000 and applying a 15% depreciation rate. The formula used involves the beginning inventory, purchases, and cost of goods sold. Thus, the final answer for July's depreciation expense is $3,000.
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