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 $\boxed{ 3,000} .
Explanation
Understanding the Problem We are given the beginning inventory, purchases, and COGS (Cost of Goods Sold) for July, all in thousands of dollars. We also know the depreciation rate is 15%. Our goal is to calculate the inventory depreciation expense for July.
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:
Beginning Inventory = $30,000 Purchases = $30,000 COGS = $40,000
So, the ending inventory is:
Ending Inventory = $30,000 + $30,000 - $40,000 = $20,000
Calculating Depreciation Expense Next, we calculate the depreciation expense for July by multiplying the ending inventory by the depreciation rate (15%):
Depreciation Expense = Ending Inventory × Depreciation Rate
Depreciation Expense = $20,000 × 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. Imagine a small business owner who sells handmade crafts. They need to account for the decreasing value of their inventory over time due to factors like obsolescence or damage. By calculating depreciation expense, the owner can accurately reflect the true value of their assets and make informed decisions about pricing, production, and inventory management. This ensures the business maintains a realistic financial picture and complies with accounting standards.
The inventory depreciation expense for July is calculated to be $3,000. This is derived from the ending inventory of $20,000 multiplied by the depreciation rate of 15%.
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