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Chapter 9: Q. 9-4E (page 476)

Dover Company began operations in 2017 and determined its ending inventory at cost and at LCNRV at December 31, 2017, and December 31, 2018. This information is presented below. Cost Net Realizable Value 12/31/17 \(346,000 \)322,000 12/31/18 410,000 390,000 Instructions (a) Prepare the journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual inventory system using the cost-of-goods-sold method. (b) Prepare journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual system using the loss method. (c) Which of the two methods above provides the higher net income in each year?

Short Answer

Expert verified
  1. Under the cost of goods sold method, the cost of goods sold account will be debited, and the inventory account will be credited by $24,000 in 2017. In 2018, the amount will be $20,000.
  2. Under the loss method in 2017, loss due to market decline of inventory is debited, and Allowance to reduce inventory to market is credited by $24,000. In 2018, Allowance to reduce inventory to market will be debited, and Recovery of loss due to market decline of inventory is credited by $4,000.
  3. In the year 2018, net income will be higher in both methods.

Step by step solution

01

Calculate decline in the value of inventory in 2017 in 2018

Inventory at cost equals $346,000, and inventory鈥檚 net realizable value is $322,000. Per LCNRV, inventory value will be equal to $322,000, as it is the lowest between the two.

Declineininventory=inventorycost-inventoryasperLCNRV=$346,000-$322,000=$24,000

Inventory at cost equals $410,000, and inventory鈥檚 net realizable value is $390,000. Per LCNRV, inventory value will be equal to $390,000, as it is the lowest between the two.

Declineininventory=inventorycost-inventoryasperLCNRV=$410,000-$390,000=$20,000

02

Journal entries in both years using cost of goods sold method

  1. Journal entries for both years are as follows:

Date

Accounts

Debit

Credit

12/31/17

Cost of goods sold

$24,000

Inventory

$24,000

12/31/18

Cost of goods sold

$20,000

Inventory

$20,000

03

Journal entries in both years using loss method

  1. Journal entries for both years are as follows:

Date

Accounts

Debit

Credit

12/31/17

Loss due to market decline of inventory

$24,000

Allowance to reduce inventory to market

$24,000

12/31/18

Allowance to reduce inventory to market

$4,000

Recovery of loss due to market decline of inventory

$4,000

04

Calculation of loss recovery in 2018

Loss recovery in 2018 is calculated as follows:

Lossrecoveryin2018=Declinein2017-Declinein2018=$24,000-$20,000=$4,000

05

Effect on net income

(C) In 2017, ending inventory will be recorded at a reduced value of $24,000, which will increase the cost of goods sold, and, overall, will decrease the net income in 2017.

In 2018, ending inventory will be recorded at a reduced value of $20,000, which will decrease the cost of goods sold, and, overall, will increase the net income in 2018 compared to 2017. This effect is applied to both methods.

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Most popular questions from this chapter

The net realizable value of Lake Corporation鈥檚 inventory has declined below its cost. Allyn Conan, the controller, wants to use the loss method to write down inventory because it more clearly discloses the decline in the net realizable value and does not distort the cost of goods sold. His supervisor, financial vice president Bill Ortiz, prefers the costof-goods-sold method to write down inventory because it does not call attention to the decline in net realizable value. Instructions Answer the following questions. (a) What, if any, is the ethical issue involved? (b) Is any stakeholder harmed if Bill Ortiz鈥檚 preference is used? (c) What should Allyn Conan do?

Kumar Inc. uses a perpetual inventory system. At January 1, 2017, inventory was \(214,000,000 at both cost and net realizable value. At December 31, 2017, the inventory was \)286,000,000 at cost and $265,000,000 at net realizable value. Prepare the entry under (a) the cost-of-goods-sold method and (b) the loss method.

Question:What are the major uses of the gross profit method?

Barrick Gold Corporation, with headquarters in Toronto, Canada, is the world鈥檚 most profitable and largest gold mining company outside South Africa. Part of the key to Barrick鈥檚 success has been due to its ability to maintain cash flow while improving production and increasing its reserves of gold-containing property. In the most recent year, Barrick achieved record growth in cash flow, production, and reserves. The company maintains an aggressive policy of developing previously identified target areas that have the possibility of a large amount of gold ore, and that have not been previously developed. Barrick limits the riskiness of this development by choosing only properties that are located in politically stable regions, and by the company鈥檚 use of internally generated funds, rather than debt, to finance growth. Using Your Judgment 491 492 Chapter 9 Inventories: Additional Valuation Issues Barrick鈥檚 inventories are as follows. Barrick Gold Corporation Inventories (in millions, US dollars) Current Gold in process \(133 Mine operating supplies 82 \)215 Non-current (included in Other assets) Ore in stockpiles \(65 Instructions (a) Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpiles, is considered to be a non-current asset? (b) Consider that Barrick has no finished goods inventories. What journal entries are made to record a sale? (c) Suppose that gold bullion that cost \)1.8 million to produce was sold for $2.4 million. The journal entry was made to record the sale, but no entry was made to remove the gold from the gold in process inventory. How would this error affect the following? Balance Sheet Income Statement Inventory ? Cost of goods sold ? Retained earnings ? Net income ? Accounts payable ? Working capital ? Current ratio ?

(LCNRV鈥擡rror Effect) LaGreca Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, included product X. Relevant per-unit data for product X are as follows. Estimated selling price \(50 Cost 40 Estimated selling costs 14 Normal profi t 9 There were 1,000 units of product X on hand at December 31, 2017. Product X was incorrectly valued at \)38 per unit for reporting purposes. All 1,000 units were sold in 2018. Instructions Compute the effect of this error on net income for 2017 and the effect on net income for 2018, and indicate the direction of the misstatement for each year.
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