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Chapter 9: Question 5BE (page 475)

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

Short Answer

Expert verified

(a) To record the decline in inventory, the cost of goods sold will be debited, and the inventory will be credited by $21,000, respectively.

(b) To record the decline, the loss due to the decline of inventory to market will be debited, and the allowance to reduce inventory to market will be credited by $21,000, respectively.

Step by step solution

01

Calculation of decline in inventory

Inventory at cost equals $286,000 and at market equals $265,000. Hence, per the lower-of-cost-or-market method, the inventory value equals $265,000.

The decline is calculated as follows:

Decline=Cost-Lowerofcostormarket=$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 Market

$21,000

Allowance to Reduce Inventory to Market

$21,000

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