In: Accounting
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.
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) |