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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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Inventory Write-Down The inventories of Berry Company for the years 2019 and 2020 are as follows:

Chapter 8, Problem 6E, Inventory Write-Down The inventories of Berry Company for the years 2019 and 2020 are as follows:

Berry uses a perpetual inventory system 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:
  2. a. direct method
  3. b. allowance method
  4. 2. Next Level Explain any differences in inventory valuation and income between the two methods.

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-down: As per GAAP (Generally Accepted Accounting Principles), the companies are required to determine the cost of the ending inventory at the end of the each reporting period Thus, when a company finds that the amount of benefit expected from the ending inventory is below its cost, it  passes an adjusting journal entry to reduce the reported inventory amount and the net income for that period. Hence, the adjusting journal entry that is recorded at the year-end is known as inventory write-down

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 ExplanationPost RefDebit($)Credit($)
December 31, 2019Cost of goods sold  1,500 
     Inventory  1,500
 (To record the inventory at lower of cost or NRV)   
December 31, 2020Cost of goods sold 1,000 
     Inventory  1,000
 (To record the cost of goods sold)   

Table (1)

b.

Allowance method:

DateAccount Title and ExplanationPost RefDebit($)Credit($)
December 31, 2019Loss on Write-Down of Inventory 1,500 
         Allowance to Reduce Inventory to NRV  1,500
 (To record the inventory at lower of cost or market)   
DateAccount Title and ExplanationPost ...

2.

To determine

Describe the differences in inventory valuation and income between two methods.

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