Question

Company began operations in 2019 and determined its ending inventory at cost and at lower-of-LIFO cost-or-market at December 31, 2019, and December 31, 2020. This information is presented below:

Cost Lower-of-Cost-or-Market
12/31/19 $356,000 $327,000
12/31/20 420,000 395,000
(a) Prepare the journal entries required at December 31, 2019, and December 31, 2020, assuming that the inventory is recorded at market, and a perpetual inventory system (cost-of-goods-sold method) is used. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit 12/31/19 12/31/20
(b) Prepare journal entries required at December 31, 2019, and December 31, 2020, assuming that the inventory is recorded at market under a perpetual system (loss method is used). (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit 12/31/19 12/31/20
(c) Which of the two methods above provides the higher net income in each year?

Answer 1

1. 12/31/19

Dr Cost of Goods Sold29,000

Cr Allowance to reduce29,000

Inventory to Market

12/31/20

Dr Allowance to Reduce 4,000

Inventory to Market

Cr Cost of Goods Sold 4,000

2. 12/31/19

Dr Loss due to market 29,000

Decline of Inventory

Cr Allowance to reduce29,000

Inventory to Market

12/31/20

Dr Allowance to Reduce 4,000

Inventory to Market

Cr Loss due to market 4,000

Decline of Inventory

C) Both the two methods provides the same net income each year

Step-by-step explanation:

1. Preparation of the journal entries for both December 31, 2019, and December 31, 2020, assuming that the inventory is recorded at market, and perpetual inventory system

First step is to compute for inventory to market for December 31, 2019 and December 31, 2020

December 31, 2019

Cost of inventory at 12/31/19 $356,000

Less:Lower of cost or market at 12/31/19 (327,000)

Allowance amount needed to reduce inventoryto market (a)$29,000

December 31, 2020

Cost of inventory at 12/31/20 $420,000

Less: Lower of cost or market at 12/31/20(395,000)

Allowance amount needed to reduce inventoryto market (b)$25,000

Second step is to find the Recovery of previously recognized loss amount

Recovery of previously recognized loss = (a) – (b)

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

Recovery of previously recognized loss= $4,000

Now let prepare the Journal entry for December 31, 2019 and December 31, 2020

12/31/19

Dr Cost of Goods Sold29,000

Cr Allowance to reduce29,000

Inventory to Market

12/31/20

Dr Allowance to Reduce 4,000

Inventory to Market

Cr Cost of Goods Sold 4,000

2. Preparation for the journal entries for both Dec. 31, 2019 and Dec 31, 2020,assuming that the inventory is recorded at market under a perpetual system

12/31/19

Dr Loss due to market 29,000

Decline of Inventory

Cr Allowance to reduce29,000

Inventory to Market

12/31/20

Dr Allowance to Reduce 4,000

Inventory to Market

Cr Loss due to market 4,000

Decline of Inventory

C) Both the two methods provides the same net income each year