Question

As a result of its annual inventory count, Flounder Corp. determined its ending inventory at cost and at lower of cost and net realizable value at December 31, 2019, and December 31, 2020. December 31, 2019, was Flounder’s first year end. This information is as follows:

		Cost			Lower of Cost and NRV
Dec. 31, 2019		$	321,700		$283,350
Dec. 31, 2020			386,000		351,250

A. Prepare the journal entries required at December 31, 2019 and 2020, assuming that the inventory is recorded directly at the lower of cost and net realizable value and a periodic inventory system is used. (Credit account titles are automatically indented when the 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.)

B. Prepare the journal entries required at December 31, 2019 and 2020, assuming that the inventory is recorded at cost and an allowance account is adjusted at each year end under a periodic system. (Credit account titles are automatically indented when the 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.)

C. Which of the two methods above provides the higher net income in each year?

A list of possible accounts is as follows:

Accounts Payable
Accounts Receivable
Allowance to Reduce Inventory to NRV
Biological Assets
Buildings
Cash
Cost of Goods Sold
Equipment
Interest Expense
Interest Income
Interest Payable
Interest Receivable
Inventory
Inventory Over and Short
Land
Liability for Onerous Contracts
Loss on Inventory Due to Decline in NRV
Loss on Purchase Contracts
No Entry
Purchase Discounts
Purchase Discounts Lost
Purchase Returns and Allowances
Purchases
Raw Materials
Realized Gain or Loss
Rebate Receivable
Recovery of Loss on Inventory Due to Decline in NRV
Refund Liability
Retained Earnings
Sales Returns and Allowances
Sales Revenue
Supplies Expense
Unrealized Gain or Loss

Answer 1

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Part A
12/31/19	Inventory	$     283,350
	Cost of Goods Sold		$   283,350
12/31/20	Cost of Goods Sold	$     283,250
	Inventory		$   283,250
12/31/20	Inventory	$     321,700
	Cost of Goods Sold		$   321,700
Part B
12/31/19	Inventory	$     321,700
	Cost of Goods Sold		$   321,700
	Loss on Inventory Due to Decline in NRV	$       38,450
	Allowance to Reduce Inventory to NRV		$     38,450
12/31/20	Cost of Goods Sold	$     321,700
	Inventory		$   321,700
12/31/20	Inventory	$     386,000
	Cost of Goods Sold		$   386,000
	Allowance to Reduce Inventory to NRV	$         3,600
	Recovery of Loss Due to Decline in NRV of Inventory		$        3,600
	Cost of inventory at 12/31/19	$     321,700
	Lower of cost and NRV at 12/31/19	$   -283,350
	Allowance amount needed to reduce inventory to NRV (a)	$       38,350
	Cost of inventory at 12/31/20	$     386,000
	Lower of cost and NRV at 12/31/20	$   -351,250
	Allowance amount needed to reduce inventory to NRV (b)	$       34,750
	Recovery of previously recognized loss (a-b)	$         3,600
Part c	Both methods of recording lower of cost and NRV adjustments have the same effect on net income.