Question

Skysong 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		$332,620		$312,620
12/31/20		375,420		359,540

(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?

Cost-of-goods sold method OR  Loss method OR Both methods have the same effect

Answer 1

(a)
Date	Account Titles and Explanations	Debit   (in $ )	Credit (in $ )
12/31/19	Cost of Goods sold ( $ 332,620 (-) $ 312,620 )	$ 20,000
	Allowance to Reduce Inventory to Market		$ 20,000
12/31/20	Allowance to Reduce Inventory to Market ( $ 20,000 (-) [ $ 375,420 (-) $ 359,540)	$ 4,120
	Cost of goods sold		$ 4,120

b)
Date	Account Titles and Explanations	Debit   (in $ )	Credit (in $ )
12/31/19	Loss due to Market Decline of Inventory	$ 20,000
	Allowance to Reduce Inventory to market		$ 20,000
12/31/20	Allowance to Reduce Inventory to market	$ 4,120
	Loss due to Market Decline of Inventory		$ 4,120

c )	Both methods have the same effect