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Freeze Corporation uses the lower of cost or net realizable value method to write down inventory. Freeze determines that the inventory should be written down by $1,000. The effect on the financial statements is to ______.

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Answer:

The journal entry to record the write down is:

Dr Cost of goods sold 1,000

    Cr Inventory 1,000

Since cost of goods sold increases, then net income (income statement) will decrease. A decrease in net income will also result in lower retained earnings (balance sheet).

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