Given the following information for the Network Company: Date Cost Market Decemb
ID: 2573844 • Letter: G
Question
Given the following information for the Network Company:
Date
Cost
Market
December 31, 2004
$ 800
$ 800
December 31, 2005
1,000
940
December 31, 2006
1,100
1,060
If the allowance method of recording lower of cost or market is in use, which December 31, 2006 entry is not correct?
a.
Loss Due to Market Valuation 40
Allowance to Reduce Inventory to Market 40
b.
Allowance to Reduce Inventory to Market 20
Loss Recovery Due to Market Valuation 20
c.
Inventory 1,100
Income Summary 1,100
d.
Income Summary 1,000
Inventory 1,000
Please explain the answer. Thank you.
Date
Cost
Market
December 31, 2004
$ 800
$ 800
December 31, 2005
1,000
940
December 31, 2006
1,100
1,060
Explanation / Answer
Ans.a.
Loss Due to Market Valuation 40
Allowance to Reduce Inventory to Market 40
Let's take a look to overall cost of inventory for all 3 years -
in 2004 there is no difference between cost and market value
In 2005 cost is $60 more than the market value so the entry would be :
Loss Due to Market Valuation 60
Allowance to Reduce Inventory to Market 60
Then in 2006 we can see the cost is $40 higher than market value then the previous entry will be reversed to $20 so the overall effect would be $40 (i.e. 60-20 =40)
i.e. Allowance to Reduce Inventory to Market $20
Loss Due to Market Valuation $20
So the fist entry is incorrect.
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