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Chapter 9: Question 3BE (page 475)

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.

Short Answer

Expert verified

(a) Under the cost of goods sold method, the decline in inventory will be recorded by debiting the cost of goods sold and crediting inventory by $21,000, respectively.

(b) Under the loss method, it will be recorded by debiting the loss due to the decline of inventory to NRV and crediting inventory by $21,000, respectively.

Step by step solution

01

Calculation of inventory decline

The inventory at cost equals $286,000 and NRV equals $265,000. Hence, per the LCNRV method, the inventory value equals $265,000.

The decline in the value of inventory is calculated as follows:

Decline=Cost-LCNRV=$286,000-$265,000=$21,000

02

Journal entry under the cost of goods sold method

(a) Entry under the cost of goods sold method is as follows:

Date

Accounts

Debit

Credit

Cost of Goods Sold

$21,000

Inventory

$21,000

03

Journal entry under the loss method

(b) Entry under the loss method is as follows:

Date

Accounts

Debit

Credit

Loss Due to Decline of Inventory to NRV

$21,000

Inventory

$21,000

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