The following are the inventories for the years 2016, 2017, and 201s for Parry C

Question

The following are the inventories for the years 2016, 2017, and 201s for Parry Company: Cost Market January 1, 2016 $50,000 $50,000 December 31, 2016 64,00060,000 December 31, 2017 71,000 70,0o0 December 31, 2018 75,000 78,000 Required: 1. Assume the inventory that existed at the end of each year was sold in the subsequent year. Prepare journal entries to record the lower of cost or market for each of the following alternatives a. allowance method, perpetual inventory system b. direct method, perpetual inventory system 2. Next Level Explain any differences in inventory valuation and income between the two methods

Explanation / Answer

1. a Allowance method, perpetual system

1. b Direct method, perpetual system

2. Explain any differences in inventory valuation and income between the two methods

Under Direct Method, Inventory is directly reduced to its matket value through journal entry. However in Allowance method we establish a seperate contra asset and write off the loss of inventory from cost to market in journal entry, and in balance sheet we deduct the contra asset account balance from the inventory balance which is at its cost.

Income between both the method of inventory valuation is same.

Date Account Debit Credit 31-Dec-16 Loss due to Market Decline of Inventory $4,000 Allowance to reduce inventory to market $4,000 (For reducing inventories to market) 31-Dec-17 Loss due to Market Decline of Inventory $1,000 Allowance to reduce inventory to market $1,000 (For reducing inventories to market)

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