Question

Corrs Company began operations in 2016 and determined its ending inventory at cost and at lower-of-LIFO cost-or-market at December 31, 2016, and December 31, 2017. This information is presented below:

Cost

Lower-of-Cost-or-Market

12/31/16 $356,000 $327,000
12/31/17 420,000 395,000

(a) Prepare the journal entries required at December 31, 2016, and December 31, 2017, assuming that the inventory is recorded at market, and a perpetual inventory system (cost-of-goods-sold method) is used.

(b) Prepare journal entries required at December 31, 2016, and December 31, 2017, assuming that the inventory is recorded at market under a perpetual system (loss method is used).

(c) Which of the two methods above provides the higher net income in each year? Both, COGS Method, or Loss Method?

Answer 1

Step-by-step explanation:

Journal entries:

a)

Dec 31, 2016

Dr Cost of Goods Sold 29,000

Cr Allowance to reduce inventory to market 29,000

Dec 31, 2017

Dr Allowance to reduce inventory to market 4,000

Cr Cost of Goods Sold 4,000

Calculations:

Inventory cost at 31 December 2016 = 356,000

Less: Lower of cost or market at 31 December 2016 (327,000)

Allowance to reduce inventory to market 29,000

Inventory cost at December 31, 2017 420,000

Less: Lower of cost or market at 31 December 2017 (395,000)

Allowance to reduce inventory to market 25,000

Recovery of previously recognized loss = 29,000 - 25,000 = 4,000

b)

Dec 31, 2017

Dr Loss due to market decline of inventory 29,000

Cr Allowance to reduce inventory to market 29,000

Dec 31, 2017

Dr Allowance to reduce inventory to market 4,000

Cr Loss due to market decline of inventory 4,000

c) In the both cases, net income is the same