Question

QUESTION 1

The inventory records of Frost Company for the years 2016 and 2017 reveal the cost and market of the January 1, 2016, inventory to be $125,000. On December 31, 2016, the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2017, market value of inventory was $140,000, and the cost was only $135,000. Frost uses a perpetual inventory system.

	Required:
1.	Assume the inventory that existed at the end of 2016 was sold in 2017. Prepare the journal entries at the end of 2016 and 2017 to record the lower of cost or market under the: a. allowance method b. direct method
2.	Show the presentation of cost of goods sold and inventory on Frost’s income statement and balance sheet for 2016 and 2017 under the: a. allowance method (assume the cost of goods sold prior to applying the lower of cost or market was $595,000 and $605,000 for 2016 and 2017, respectively) b. direct method

general journal

Assume Frost uses the allowance method and a perpetual inventory system.

Prepare the necessary journal entries to record: 1. the correct inventory valuation on December 31, 2016 2. the reduction in inventory when the inventory from December 31, 2016 is sold during 2017 Additional Instructions 3. the correct inventory valuation on December 31, 2017 (if necessary)

Answer 1

	PART 1 .
	DIRECT METHOD
	Date	Accounts & Explanation	Debit ($)	Credit ($)
	31-12-2016	Cost of goods sold	2,000.00
		Inventory		2,000.00
		(Inventory recorded at lower of cost or market price)
	31-12-2017	No entry required as cost is lower

	ALLOWANCE METHOD
	Date	Accounts & Explanation	Debit ($)	Credit ($)
	31-12-2016	Loss from reducing Inventory to Lower of Cost & Market value	2,000.00
		Allowance to reduce inventory		2,000.00
	21-12-2017	Allowance to reduce inventory	2,000.00
		Loss from reducing Inventory to Lower of Cost & Market value		2,000.00

PART 2
DIRECT METHOD
	INCOME STATEMENT	2016	2017
	Cost of goods sold	595,000.00	605,000.00
	Add : Inventory adjustment	2,000.00	-
	Revised Cost of goods sold	597,000.00	605,000.00
	BALANCE SHEET	2016	2017
	Inventory	128,000.00	135,000.00

ALLOWANCE METHOD
	INCOME STATEMENT	2016	2017
	Sales
	Less: Cost of goods sold	595,000.00	605,000.00
	Gross profit
	Less:Loss from reducing Inventory to Lower of Cost & Market value	2,000.00
	Add : Restoration of inventory loss		2,000.00
	Net Profit
	BALANCE SHEET	2016	2017
	Inventory	130,000.00	135,000.00
	Less: Allowance to reduce inventory	2,000.00	-
		128,000.00	135,000.00