Calculate the inventory depreciation expense for August using a 15% depreciation rate.
| | Begin Inv. | Purchases | COGS |
| :-------- | :--------- | :-------- | :--- |
| June | 60 | 20 | 50 |
| July | 30 | 30 | 40 |
| August | 20 | 60 | 40 |
Answer (1)
6000
Explanation
Understanding the Problem We are given the beginning inventory, purchases, and cost of goods sold (COGS) for August, and we need to calculate the inventory depreciation expense using a 15% depreciation rate.
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
Using the values from the table for August (in thousands of dollars):
Beginning Inventory = $20 Purchases = $60 COGS = $40
So, the ending inventory is:
Ending Inventory = $20 + $60 - $40 = $40 (in thousands of dollars).
Calculating Depreciation Expense Next, we calculate the depreciation expense by multiplying the ending inventory by the depreciation rate (15%):
Depreciation Expense = Ending Inventory × Depreciation Rate
Depreciation Expense = $40 \times 0.15 = $6 (in thousands of dollars).
Final Answer Therefore, the inventory depreciation expense for August is $6,000.
Examples
Inventory depreciation is a crucial concept in accounting. For example, a clothing store needs to account for seasonal changes and fashion trends. If they don't sell winter coats by the end of winter, the value of those coats decreases. Calculating depreciation helps the store accurately reflect the value of its inventory on its balance sheet and make informed decisions about pricing and inventory management. This ensures the store's financial statements provide a true picture of its financial health.
