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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 8, Problem 19E
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Intermediate Accounting: Reporting...

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

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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 inventories of Berry Company for the years 2019 and 2020 are as follows:

Chapter 8, Problem 19E, (Appendix 8.1) Inventory Write-Down The inventories of Berry Company for the years 2019 and 2020 are

Berry uses the periodic inventory method and the FIFO inventory cost flow assumption.

Required:

  1. 1. Assume the inventory that existed at the end of 2019 was sold in 2020. Prepare the necessary journal entries at the end of each year to record the correct inventory valuation if Berry uses the:
    1. a. direct method
    2. b. allowance method
  2. 2. Next Level Refer to your answer for E8-6. How does the use of a periodic or perpetual inventory system affect the valuation of inventory?

1.

To determine

Prepare journal entries to record the correct valuation of inventory at end of each year (if B uses direct and allowance 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

The following are two approaches of recording the reduction of inventory:

  • Allowance method
  • Direct method

Under allowance method, the loss is recorded in a separate inventory valuation account and a loss account.

Under direct method, the loss is directly recorded by reducing the inventory account and increasing the cost of goods sold account of a company.

Prepare journal entries to record the correct valuation of inventory at end of each year (if B uses direct and allowance method).

a.

Direct method:

DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
December 31, 2019Income Summary (SE–) 10,000 
       Inventory (A–)  10,000
 (To record the close of beginning inventory)   
     
 Inventory (A+) 11,500 
        Income Summary (SE+)  11,500
 (To record the ending inventory)   
DateAccount Title and ExplanationPostDebitCredit
Ref.($)($)
December 31, 2020Income Summary (SE–) 11,500 
       Inventory (A–)  11,500
 (To record the close of beginning inventory)   
     
 Inventory (A+) 14,000 
        Income Summary (SE+)  14,000
 (To record the ending inventory)   

Table (1)

b.

Allowance method:

DateAccount Title and ExplanationPostDebitCredit
Ref...

2.

To determine

Describe the way in which periodic inventory or perpetual system affects the inventory valuation.

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