Calculate the inventory depreciation expense for August using a 25% depreciation rate.
| | Begin Inv. | Purchases | COGS |
| :----- | :---------- | :-------- | :--- |
| June | 50 | 20 | 60 |
| July | 10 | 70 | 50 |
| August | 30 | 40 | 20 |
Answer (1)
Calculate the ending inventory: Ending Inventory = Beginning Inventory + Purchases - COGS = $30,000 + $40,000 - $20,000 = $50,000.
Calculate the depreciation expense: Depreciation Expense = Ending Inventory x Depreciation Rate = $50,000 x 0.25 = $12,500.
The inventory depreciation expense for August is $12,500.
Therefore, the inventory depreciation expense for August is 12.5 (in $000).
Explanation
Understanding the Problem We are given the beginning inventory, purchases, and COGS (Cost of Goods Sold) for August. We are also given a depreciation rate of 25%. Our goal is 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 = $30,000 Purchases = $40,000 COGS = $20,000
Plugging these values into the formula, we get:
Ending Inventory = $30,000 + $40,000 - $20,000 = $50,000
Calculating Depreciation Expense Next, we need to calculate the depreciation expense for August. The depreciation rate is 25%, which can be written as 0.25. The formula for depreciation expense is:
Depreciation Expense = Ending Inventory x Depreciation Rate
Plugging in the values, we get:
Depreciation Expense = $50,000 x 0.25 = $12,500
Final Answer Therefore, the inventory depreciation expense for August is $12,500. Since the table is in thousands of dollars, the answer is 12.5 (in $000).
Examples
Inventory depreciation is a common concept in accounting. For example, a store selling seasonal goods like winter clothing needs to account for the fact that the value of unsold winter clothes decreases significantly after winter. Calculating depreciation helps the store accurately reflect the value of its inventory on its balance sheet and make informed decisions about pricing and ordering.
