Question

. LO 11 – Lower of cost and net realizable value The controller of Utah Corp. has provided you with the following information related to its inventory: Date Cost Net Realizable Value Dec. 31, 2019 $457,000 $410,000 Dec. 31, 2020 615,000 555,000 Dec. 31, 2021 389,000 355,000 Dec. 31, 2022 450,000 465,000 Utah uses a periodic inventory system. Assume that 2019 was Utah’s first year of operations. Required: Prepare the journal entries that are required at December 31, 2020 and December 31, 2021, assuming that inventory is recorded at cost and reduced to net realizable value using an allowance account.

Answer 1

1.Journal entries at December 31, 2020 in Utah Corporation Books

Inventory A/c	Dr	$205000
To Purchase A/c	Cr	$205000
(Being the amount in purchase a/c transfered to Inventory a/c in year end)
Allowance A/c	Dr	$60000
To Inventory A/c	Cr	$60000
(Being the balance in Invetory account reduced to NRV using allowance A/c)

Amount to be transfered to Inventory A/c from Purchase A/c:

Closing Inventory as on 31 December 2019= $410000

Closing Inventory as on 31 December 2020=$615000(at cost)

Purchases made during the year=$615000-$410000= $205000

2.Journal entries at December 31, 2021 in Utah Corporation Books

Cost of Goods sold A/c	Dr	$166000
To Inventory A/c	Cr	$166000
(Being the entry passed for sales during the year)
Allowance A/c	Dr	$34000
To Inventory A/c	Cr	$34000
(Being the balance in Invetory account reduced to NRV using allowance A/c)

Amount to be transfered to COGS A/c from PInventory A/c:

Closing Inventory as on 31 December 2020= $555000

Closing Inventory as on 31 December 2021=$389000(at cost)

Sales made during the year=$555000-$389000 = $166000