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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

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