Discussion:Purchase inventory in Bulk
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| 17 April 2008 | |
| I have a client who purchases used shoes in bulk. He stated that they are weighed when purchased. He then sort them out and dumps some of them that he cannot sell; which he stated that he weighs when disposed of at the dump. He also purchase used mattresses by the trailer load and sort and disposes of those that he is unable to to sell. He sells both the shoe and mattress Wholesale.
How does he value and account for the items that are disposed of. He stated that he was audited by the IRS and was told that he had to include the items disposed of in COGS. What is the journal entry. | |
Nancyshoemake (talk|edits) said: | 17 April 2008 |
| If the initial entry would be a debit to inventory and the items are not able to be sold - I would create an expense account for worthless inventory and debit that account while crediting inventory. Since the items technically are not items that were sold - it would not be a true representation of the cgs. | |
| 17 April 2008 | |
| How would you place a cost on the items that are disposed of. | |
Nancyshoemake (talk|edits) said: | 18 April 2008 |
| you have to find some method of valuing the whole lot. I have one client that would purchase a lot based on one or two items so even though he received a volume it was truly of no value because the whole lot was purchased for 2 items. In this scenario the cost of the items thrown out was $0. | |
| 18 April 2008 | |
| FYI, you also have some comments and follow-up questions on the Inventory_purchased_in_bulk discussion over in the Tax forum. | |
| 18 April 2008 | |
| Can one assume, and I guess that was the IRS agent thoughts were as well, that when the lot(bulk) was purchased it was valued in such a way so that the unusable items were accounted for in the cost of the bulk. If that assumption is incorrect and it was presumed by both buyer and seller that all items were usable then is valuing the shoe by the weight a correct method. Can he value COG purchased one way and COGS sold another way. For example purchase by the pound and sold by the dozen. In either scenario how would the unuasbe items be valued. | |
RoyDaleOne (talk|edits) said: | 18 April 2008 |
| The theory is that unuseably items purchase to obtain useable items would be costed at the scrape value. The remaining item have the burden of recovering the "total cost" of the purchase.
The change of the base units used in costing inventory is acceptable. I would go with Nancy's example as the "best" fit. | |
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