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)
Calculate the ending inventory for July: Ending Inventory = Beginning Inventory + Purchases - COGS = $30,000 + $30,000 - $40,000 = $20,000.
Calculate the depreciation expense for July: Depreciation Expense = Ending Inventory * Depreciation Rate = $20,000 * 0.15 = $3,000.
The inventory depreciation expense for July is $3 , 000 .
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
Using the values from the table for July (in thousands of dollars):
Beginning Inventory = $30,000 Purchases = $30,000 COGS = $40,000
Applying the Formula Now, we plug these values into the formula:
Ending Inventory = $30,000 + $30,000 - $40,000 = $20,000
Calculating Depreciation Expense Next, we calculate the depreciation expense for July. The depreciation rate is 15%. The formula for depreciation expense is:
Depreciation Expense = Ending Inventory \times Depreciation Rate
Depreciation Expense = $20,000 \times 0.15 = $3,000
Final Answer Therefore, the inventory depreciation expense for July is $3,000.
Examples
Inventory depreciation is a common concept in accounting. For example, a clothing store might need to depreciate its inventory at the end of a season because the clothes are no longer in style. Similarly, a grocery store might need to depreciate perishable items that are close to their expiration dates. Understanding how to calculate depreciation expense is important for businesses to accurately reflect the value of their assets.
The inventory depreciation expense for July, calculated using a 15% rate on the ending inventory of $20,000, is $3,000.
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