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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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(Appendix 8.1) Inventory Write-Down Frost Company’s inventory records tor the years 2019 and 2020 reveal the cost and market of the January 1, 2019, inventory to be $125,000. On December 31, 2019, the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2020, market value of inventory was $140,000, and the cost was only $135,000. Frost uses a periodic inventory system. Purchases for 2019 were $100,000 and for 2020 were $110,000.

Required:

  1. 1. Assume the inventory that existed at the end of 2019 was sold in 2020. Prepare the journal entries at the end of 2019 and 2020 to record the lower of cost or net realizable value under the (a) allowance method and (b) direct method.
  2. 2. Prepare the cost of goods sold section of the income statement and show how the company would record the inventory on its balance sheet for 2019 and 2020 under the (a) allowance method and (b) direct method.
  3. 3. Next Level Refer to your answer for P8-3. How does the use of a periodic inventory system versus a perpetual inventory system affect the valuation of inventory and the amount reported as income?

1.

To determine

Prepare journal entries to record lower of cost or market under allowanceand direct method.

Explanation

Inventory Write-Downs: If the utilizing capacity of inventory by the company has drops down below the acquisition cost of inventory, the inventory write-downs occur.

The following are the two situations for the inventory write-downs:

  • When the inventory is damaged or is in non-salable state
  • When the market value of inventory has dropped below the acquisition cost

Allowance method: In a separate inventory valuation account and loss account, the loss is recorded.

a.

Prepare journal entries to record lower of cost or market under allowance method:

DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
2019Income Summary (SE–) 125,000 
       Inventory (A–)  125,000
 (To record the close of beginning inventory)   
     
 Inventory (A+) 130,000 
        Income Summary (SE+)  130,000
 (To record the ending inventory)   
     
 Loss on Write-Down of Inventory (SE–) 2,000 
         Allowance to Reduce Inventory to NRV (A–)  2,000
 (To record the inventory at lower of cost or NRV)   
 
DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
 2020Income Summary (SE–) 128,000 
 Allowance to Reduce Inventory to NRV (A+) 2,000 
   Inventory (A–)  130,000
 (To record the close of beginning inventory)   
     
 Inventory (A+) 135,000 
        Income Summary (SE+)  135,000
 (To record the ending inventory)   

Table (1)

b...

2.

To determine

Prepare the cost of goods sold section of the income statement and record the inventory on its balance sheet for 2019 and 2020.

3.

To determine

Describe the differences in inventory valuation and income between two methods (periodic and perpetual).

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