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In: Accounting

P8-9 Milford Company determined its ending inventory at cost and at lower of cost and net...

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.

Solutions

Expert Solution

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)

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