AMC Trade Mart has recently had lacklustre sales. The rate of inventory turnover has dropped, and the merchandise is gathering dust. At the same time, competition has forced AMC's suppliers to lower the prices that AMC will pay when it replaces its inventory. It is now December 31, 2014, and the current net realizable value of AMC's ending inventory is $80,000 below what AMC actually paid for the goods, which was $190,000. Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of $780,000.
What accounting action should AMC take in this situation? Give any journal entry required. At what amount should AMC report Inventory on the balance sheet? At what amount should the company report Cost of Goods Sold on the income statement? Discuss the accounting characteristic that is most relevant to this situation. Are there circumstances that would allow AMC to increase the value of its inventory? Are there limits to which the value of the inventory may be increased?