Chapter 8, Problem 15P

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Chapter
Section

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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# (Appendix 8.1) Inventory Write-Down The following are the inventories for the years 2019, 2020, and 2021 for Parry Company:Required: 1. Assume the inventory that existed at the end of each year was sold in the subsequent year. Prepare journal entries to record the lower of cost or net realizable value for each of the following alternatives: a. allowance method, periodic inventory system b. direct method, periodic inventory system 2. Next Level Refer to your answer for P8-2. How does the use of the periodic inventory system affect the write-down of inventory to the lower of cost or net realizable value?

1.

To determine

Prepare journal entries to record the lower of cost or NRV (if P Company uses allowance and direct method under periodic inventory system).

Explanation

Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, either at current market value or at historical cost price of the inventory, whichever is less.

NRV (Net Realizable Value): It refers to an estimated selling price that a company expects to collect in the form of cash from the customers by the sale of inventory. The value is reduced by the expected cost of completion, disposal and transportation. Sales commission and shipping costs also included in the predictable cost.

a.

Prepare journal entries to record the lower of cost or NRV (if P Company uses allowance and direct method under periodic inventory system).

Allowance method:

 Date Account Title and Explanation Post Debit Credit Ref. ($) ($) 2019 Income Summary (SE–) 50,000 Inventory (A–) 50,000 (To record the close of beginning inventory) Inventory (A+) 64,000 Income Summary (SE+) 64,000 (To record the ending inventory) Loss on Write-Down of Inventory (SE–) 4,000 Allowance to Reduce Inventory to NRV (A–) 4,000 (To record the inventory at lower of cost or NRV) Date Account Title and Explanation Post Debit Credit Ref. ($) ($) 2020 Income Summary (SE–) 60,000 Allowance to Reduce Inventory to NRV (A+) 4,000 Inventory (A–) 64,000 (To record the close of beginning inventory) Inventory (A+) 71,000 Income Summary (SE+) 71,000 (To record the ending inventory) Loss on Write-Down of Inventory (SE–) 1,000 Allowance to Reduce Inventory to NRV ( (A–) 1,000 (To record the inventory at lower of cost or NRV) Date Account Title and Explanation Post Debit Credit Ref. ($) ($) 2021 Income Summary (SE–) 70,000 Allowance to Reduce Inventory to NRV ( (A+) 1,000 Inventory (A–) 71,000 (To record the close of beginning inventory) Inventory (A+) 75,000 Income Summary (SE+) 75,000 (To record the ending inventory)

Table (1)

b...

2.

To determine

Explain how periodic inventory system affects the write-down of inventory to the LCM or NRV.

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