A Company Discovered That Inventory That Cost $1000 and Normally

question 29

Multiple Choice

A company discovered that inventory that cost $1000 and normally sells for $1200 has become obsolete and will be scrapped next month.The effect of the adjusting journal entry is to:

• A) decrease profit by $1000 and decrease total assets by $1000.
• B) decrease profit by $1200 and decrease total assets by $1000.
• C) decrease profit by $1200 and decrease total assets by $1200.
• D) decrease profit by $1000 and not affect total assets.

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Definitions:

Variable Costs

Costs that vary directly with the level of production or output, such as materials and labor costs.

Economic Profit

Economic profit is the difference between total revenue and total costs, including both explicit and implicit costs, measuring the profit that exceeds the next best alternative use of resources.

Short Run

A period in economics during which at least one input is fixed and cannot be changed, limiting the ability of a firm to adjust to market changes.

Fixed Inputs

Resources used in the production process whose quantity cannot easily be changed in the short run, such as buildings and machinery.