Question

P8-9 Milford Company determined its ending inventory at cost and at lower of cost and net realizable value at December 31, 2015, 2016, and 2017, as follows:

Cost Lower of Cost and Net Realizable Value

Dec. 31, 2015 $60,000 $60,000

Dec. 31, 2016 79,000 74,500

Dec. 31, 2017 78,800 69,000

Instructions (a) Prepare the journal entries that are required at December 31, 2016 and 2017, assuming that a periodic inventory system and the direct method of adjusting to NRV are used. (b) Prepare the journal entries that are required at December 31, 2016 and 2017, assuming that a periodic inventory system is used, with inventory recorded at cost and reduced to NRV through the use of an allowance account.

Answer 1

Solution a:

Journal Entries
Date	Particulars	Debit	Credit
31 December 2016	Income Summary Dr	$60,000
	To Inventory		$60,000
	(To close Beginning Inventory)
31 December 2016	Inventory Dr	$79,000
	To Income summary		$79,000
	(To Close Ending Inventory)
31 December 2016	Inventory Change Dr ($79000 -$74500)	$4,500
	To Inventory		$4,500
	(Year end Inventory Adjustment)
31 December 2017	Income Summary Dr	$74,500
	To Inventory		$74,500
	(To close Beginning Inventory)
31 December 2017	Inventory Dr	$78,800
	To Income summary		$78,800
	(To Close Ending Inventory)
31 December 2017	Inventory Change Dr ($78800-$69000)	$9,800
	To Inventory		$9,800
	(Year end Inventory Adjustment)

Solution b:

Journal Entries
Date	Particulars	Debit	Credit
31 December 2016	Income Summary Dr	$60,000
	To Inventory		$60,000
	(To close Beginning Inventory)
31 December 2016	Inventory Dr	$79,000
	To Income summary		$79,000
	(To Close Ending Inventory)
31 December 2016	Loss on Inventory written Down ($79000-$74500)	$4,500
	To Allowance for Obsolete Inventory		$4,500
	(Year end Inventory Adjustment)
31 December 2017	Income Summary Dr	$79,000
	To Inventory		$79,000
	(To close Beginning Inventory)
31 December 2017	Inventory Dr	$78,800
	To Income summary		$78,800
	(To Close Ending Inventory)
31 December 2017	Loss on Inventory written Down ($78800-$69000)	$9,800
	To Allowance for Obsolete Inventory		$9,800
	(Year end Inventory Adjustment)