Problem:

Mooncake Company uses the perpetual inventory method. The unadjusted balance in the company's Merchandise Inventory account is $120,000 at December 31, 2014. A physical count of its inventory on that date discloses that the cost of the merchandise inventory available is $119,000.

Required:

Question: How would the company record the adjusting entry relating to the inventory shrinkage at December 31, 2014?

• Debit Merchandise Inventory for $1,000 and credit Cost of Goods Sold for $1,000.
• Debit Cost of Goods Sold for $1,000 and credit Merchandise Inventory for $1,000.
• Debit Merchandise Inventory for $1,000 and credit Purchases for $1,000.
• Debit Purchases Expense for $1,000 and credit Merchandise Inventory for $1,000.
• Debit for Merchandise Inventory for $1,000 and credit Inventory Shrinkage Expense for $1,000

Note: Explain in detail.