In: Accounting
Brief Exercise 9-03
Oriole Inc. uses a perpetual inventory system. At January 1,
2020, inventory was $215,464,100 at both cost and realizable value.
At December 31, 2020, the inventory was $291,500,300 at cost and
$268,031,000 at realizable value.
Prepare the necessary December 31 entry under (a) the
cost-of-goods-sold method (b) Loss method.
No. |
Account Titles and Explanation |
Debit |
Credit |
---|---|---|---|
(a) |
enter an account title | ||
enter an account title | |||
(b) |
enter an account title | ||
enter an account title |
|
|
Part a - Entry under the cost of goods sold method
Under cost of goods sold method, the inventory is recorded at Cost or Net Realizable Value whichever is lower.
Under this method, the cost of goods sold account is adjusted with any decrease in Inventory value.
Net Realizable Value as on Dec 31 = $268,031,000
Cost of Inventory as on Dec 31 = $291,500,300
Difference = $23,469,300
Net Realizable Value is lower so the inventory should be recorded at Net Realizable Value. Following journal entry is to be recorded:
Date |
General Journal |
Debit |
Credit |
Dec.31 |
Cost of Goods Sold (291,500,300 - 268,031,000) |
$23,469,300 |
|
Inventory |
$23,469,300 |
||
(To record Inventory at Net Realizable Value (NRV) |
Part b - Journal under under loss method
Under this method, decline of value of inventory from its cost is recorded as Decline of Inventory to NRV
Date |
General Journal |
Debit |
Credit |
Dec.31 |
Loss Due to Decline of Inventory to NRV |
$23,469,300 |
|
Inventory |
$23,469,300 |
||
(To record Inventory at Net Realizable Value (NRV) |
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