I Need the Solution for the following Problem. Any help is appreciated. Lower of
ID: 2419078 • Letter: I
Question
I Need the Solution for the following Problem. Any help is appreciated.
Lower of Cost or Market
Problem:
The inventory records of Frost Company for the years 2016 and 2017 reveal the cost and market of the January 1, 2016, inventory to be $125,000. On December 31, 2016, the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2017, market value of inventory was $140,000, and the cost was only $135,000. Frost uses a perpetual inventory system.
Required:
Assume the inventory that existed at the end of 2016 was sold in 2017. Prepare the journal entries at the end of 2016 and 2017 to record the lower of cost or market under the:
allowance method
direct method
Show the presentation of cost of goods sold and inventory on Frost's income statement and balance sheet for 2016 and 2017 under the:
allowance method (assume the cost of goods sold prior to applying the lower of cost or market was $595,000 and $605,000 for 2016 and 2017, respectively)
direct method
Explanation / Answer
Cost Market value Credit balance reqd.in All.a/c Value as on Jan-1,2016 125000 125000 0 Value as on Dec-31,2016 130000 128000 2000 Value as on Dec-31,2017 135000 140000 0 Perpetual inventory system Direct method Debit Credit Dec-31,2016 COGS(130000-128000) 2000 Inventory 2000 (To record inventory at lower of cost & market price) Dec-31,2017 No entry (cost is lower) Allowance method Dec-31,2016 Loss from reducing Inventory to Lower of Cost & Market value 2000 Allowance to reduce inventory to LCM 2000 Dec-31,2017 Allowance to reduce inventory to LCM 2000 Loss from reducing Inventory to Lower of Cost & Market value 2000 (To reduce Allowance a/c for inventory to reflect cost) Direct method Income statement-2016 COGS 595000 Add:Direct adj. for LCM Ending Inventory 2000 Revised COGS 597000 Income statement-2017 COGS 605000 Balance sheet As on Dec-31,2016 Inventory 128000 As on Dec-31,2017 Inventory 135000 Allowance method Income statement-2016 Sales Less:COGS 595000 Gross profit Less:Loss from reducing Inventory to Lower of Cost & Market value 2000 Net Profit Income statement-2017 Sales Less:COGS 605000 Gross profit Add:restoration of Inventory to Cost 2000 Net Profit Balance sheet As on Dec-31,2016 Inventory 130000 Less:Allowance to reduce inventory to LCM 2000 128000 As on Dec-31,2017 Inventory 135000
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