Question

Blossom Corporation had the following items in inventory as at December 31, 2020:

Item No.	Quantity	Unit Cost	NRV
A1	140	$2.65	$4.45
B4	145	2.15	2.05
C2	105	2.45	10.85
D3	95	8.60	7.90

Assume that Blossom uses a perpetual inventory system, and that none of the inventory items can be grouped together for accounting purposes.

Prepare the year-end adjusting entry required to adjust to the lower of cost or net realizable value on an item-by-item basis using the direct method. (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.)

Date	Account Titles and Explanation	Debit	Credit
December 31, 2020

Prepare the year-end adjusting entry required to adjust to the lower of cost or net realizable value on an item-by-item basis using the indirect method. (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.)

Date	Account Titles and Explanation	Debit	Credit
December 31, 2020

Answer 1

1) Firstly we need to calculate the lower of cost or NRV item by item basis which is shown as follows:-

Item No.	Quantity (A)	Unit Cost (B)	Total Cost (C = A*B)	NRV (D)	Total NRV (E = A*D)	Lower of Cost or NRV (lower of C and E)
A1	140	2.65	371.00	4.45	623.00	371.00
B4	145	2.15	311.75	2.05	297.25	297.25
C2	105	2.45	257.25	10.85	1,139.25	257.25
D3	95	8.60	817.00	7.90	750.50	750.50
Total			1,757.00		2,810.00	1,676.00

Total cost of inventory of B4 and D3 has decreased. The cost of B4 decreased from 311.75 to 297.25 (i.e. by 14.50) and the cost of D3 decreased from 817.00 to 750.50 (i.e. by $66.50). Total decrease in inventory cost is $81.00 ($14.50+$66.50).

2) Adjusting entry under direct method:

Under direct method, cost of goods sold is directly debited and inventory is credited by the adjustment amount of inventory. The adjusting journal entry for the given case is shown as follows:-

Journal Entries (Amounts in $)

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2020	Cost of Goods Sold	81.00
	Inventory		81.00
	(To record the adjusting entry for inventory)

3) Adjusting entry under indirect method:

Under indirect method, inventory write down account is debited instead of cost of goods sold account. The adjusting journal entry for the given case is shown as follows:- (Amounts in $)

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2020	Inventory Write Down	81.00
	Inventory		81.00
	(To record the adjusting entry for inventory)