Question

Bluebell Enterprises Ltd.'s records reported an inventory cost of $55,600 and a net realizable value of $54,000 at December 31, 2015. At December 31, 2016, the records indicated a cost of $68,700 and a net realizable value of $61,625. All opening inventory had been sold during the year.

(a)  

Assuming that Bluebell Enterprises uses a perpetual inventory system, prepare the necessary December 31, 2016 entry under (1) the direct method and (2) the indirect method.

(b)  

Assume that at December 31, 2017, the records indicate inventory with a cost of $60,000 and a net realizable value of $60,900. Prepare the necessary December 31, 2017 entry under (1) the direct method and (2) the indirect method. Explain why a “gain” is reported under the indirect method of accounting

Answer 1

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	Requirement
		Cost	NRV			Cost	NRV
	Beginning inventory dec 31 2015	$55,600	$54,000		Beginning inventory dec 31 2016	$68,700	$61,625
	Ending Inventory dec 31 2016	$68,700	$61,625	$7,075	Ending Inventory dec 31 2017	$60,000	$60,900	$900
	Date	Account Title	Dr	Cr
a		Direct Method
	dec 31 2016	Cost of Goods sold	$7,075
		Inventory		$7,075
		to record entry to reduce the inventory from cost to market (ending inventory recorded at market)
		Indirect Method
	dec 31 2016	Loss due to market decline of inventory	$7,075
		Allowance to reduce inventory to market		$7,075
b	dec 31 2017	Direct Method
		Inventory	$900
		Cost of Goods sold		$900
		to record entry to increase the inventory from cost to market value
	dec 31 2017	Indirect Method
		Allowance to reduce inventory to market	$900
		Loss due to market decline of inventory		$900
		to recover the loss on yr to yr as the price is increasing