- 6 - Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 530 n.9 (1979). In this case, petitioners used a periodic inventory system which requires an adjustment to inventory at the end of the year to reflect the physical ending inventory count. After performing the physical count, petitioners’ accountant made an adjusting journal entry for shrinkage, reflecting a $48,257.92 credit to inventory and a $48,257.92 debit to product purchases. Petitioners’ accountant then used the adjusting journal entry to reduce the trial balance of petitioners’ yearend inventory by $48,257.92 and at the same time to increase the trial balance of petitioners’ product purchases by $48,257.92. The problem is, there is nothing in the record to suggest, and petitioners do not argue, that they actually purchased $48,257.92 of goods to replace the inventory that was lost. And by including the $48,257.92 adjustment in purchases as well as ending inventory, petitioners increased their cost of goods sold reported on Schedule C (and reduced gross income) by double the amount of actual shrinkage their inventory suffered. Thus, while it was proper to reduce the ending inventory by the amount of shrinkage, it was improper for petitioners to also increase the line 36 product purchases by the same amount. Accordingly, we find that petitioners’ product purchases for 2000 were $366,574, and their cost of goods sold was $380,966Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011