At the end of the year, assume the balance of Inventory is $109,225 and physical inventory on hand is $106,320. The adjusting journal entry to record shrinkage will be:

a. a $215,545 debit to Cost of Goods Sold and a $215,545 credit to Inventory.
b. a $109,225 debit to Inventory and a $109,225 credit to Cost of Goods Sold.
c. a $2,905 debit to Cost of Goods Sold and a $2,905 credit to Inventory.
d. a $2,905 debit to Inventory and a $2,905 credit to Cost of Goods Sold.

The answer is C. a $2,905 debit to Cost of Goods Sold and a $2,905 credit to Inventory

Explanation:

Here, the physical inventory which is a current asset is lower than the inventory balance in the book. This can happen as a result of theft or error in filling the book.

The reality should be considered. The value of inventory($109,225) on the book balance should be reduced to the value of physical cash($106,320).

The difference should be calculated. The difference here is $2,905

So we debit cost of goods with this value and credit physical inventory on hand.

yup the answer is

correct, but each time you dont pay the price of the penalty can increase.