Zenith Company Inc.'s Merchandise Inventory account at the end of year 2015 has a balance of $91,820, but a physical count reveals that only $90,450 of inventory exists. The adjusting entry to record inventory shrinkage is:

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The adjusting entry to record inventory shrinkage would decrease the Merchandise Inventory account by the difference between the book balance and the physical count, which is $1,370 ($91,820 - $90,450 = $1,370). Since the inventory was lost, this amount should be recorded as an expense. Therefore, the journal entry would be:
Merchandise Inventory 1,370
Inventory Shrinkage Expense 1,370