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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 $380,966
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