Young Corporation used a perpetual inventory system. By physical count, ending Merchandise Inventory is $82,300. The balance in the Merchandise Inventory account is $80,500. Which of the following is the correct adjusting entry?
A) A debit to Income Summary of $1,800, and a credit to Merchandise Inventory of $1,800
B) A debit to Merchandise Inventory of $1,800, and a credit to Income Summary of $1,800
C) A debit to Cost of Goods Sold of $1,800, and a credit to Merchandise Inventory of $1,800
D) A debit to Income Summary of $1,800, and a credit to Cost of Goods Sold of $1,800
E) A debit to Merchandise Inventory of $1,800, and a credit to Cost of Goods Sold of $1,800

Question

Quizplus · Accepted Answer

The Merchandise Inventory account is overstated by $1,800 ($82,300 physical count – $80,500 balance in the account). The adjusting entry should reduce Merchandise Inventory and increase Cost of Goods Sold by the same amount, reflecting the cost of the goods that were sold but not properly recorded. Therefore, the correct entry is a debit to Merchandise Inventory of $1,800 and a credit to Cost of Goods Sold of $1,800. Choice E is the only option that reflects this.

Young Corporation Used a Perpetual Inventory System