Question

The inventory records of Frost Company for the years 2016 and 2017 reveal the cost and market of the January 1, 2016, inventory to be $125,000. On December 31, 2016, the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2017, market value of inventory was $140,000, and the cost was only $135,000. Frost uses a perpetual inventory system.

Assume Frost uses the allowance method and a perpetual inventory system.

Prepare the necessary journal entries to record: 1. the correct inventory valuation on December 31, 2016 2. the reduction in inventory when the inventory from December 31, 2016 is sold during 2017 3. the correct inventory valuation on December 31, 2017 (if necessary)

Assume Frost uses the direct method and a perpetual inventory system.

Prepare the necessary journal entries to record: 1. the correct inventory valuation on December 31, 2016 2. the reduction in inventory when the inventory from December 31, 2016 is sold during 2017 3. the correct inventory valuation on December 31, 2017 (if necessary)

Answer 1

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Allowance Method:
Date	Account	Debit	Credit
Dec 31 2016	Loss on write down inventory	$        2,000
	Allowance to reduce inventory to NRV		$        2,000
	(To record inventory at lower of cost or NRV)
Year 2017	Cost of Goods Sold	$   128,000
	Allowance to reduce inventory to NRV	$        2,000
	Inventory		$   130,000
Year 2017	No Entry
Direct Method:
Date	Account	Debit	Credit
Dec 31 2016	Cost of Goods Sold	$        2,000
	Inventory		$        2,000
	(To record inventory at NRV)
Year 2017	No Entry
Year 2017	No Entry