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Chapter 9: Q3P. (page 483)

Malone Company determined its ending inventory at cost and at LCNRV at December 31, 2017, December 31, 2018, and December 31, 2019, as shown below. Cost NRV 12/31/17 \(650,000 \)650,000 12/31/18 780,000 712,000 12/31/19 905,000 830,000 Instructions (a) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to LCNRV is used. (b) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory is recorded at cost and reduced to LCNRV using the loss method.

Short Answer

Expert verified

a. Journal entries under the cost of goods sold method are given in Step 2.

b. Journal entries under the loss method are given in Step 3.

Step by step solution

01

Calculation of LCRNRV and reduction in inventory

LCNRV for each date is calculated as follows:

Cost

NRV

LCNRV

Reduction in Inventory

(Cost – LCNRV)

12/31/17

$650,000

$650,000

$650,000

$0

12/31/18

780,000

712,000

712,000

68,000

12/31/19

905,000

830,000

830,000

75,000

Journal entries under cost of goods sold method

02

Journal entries under cost of goods sold method

a. Journal entries are as follows:

Date

Description

Debit

Credit

12/31/17

No Entry

12/31/18

Cost of goods sold

$68,000

Inventory

$68,000

12/31/19

Cost of goods sold

$75,000

Inventory

$75,000

03

Journal entries under the loss method

(b) Journal entries are as follows:

Date

Description

Debit

Credit

12/31/17

No Entry

12/31/18

Loss due to market decline of inventory

$68,000

Allowance to reduce inventory to market

$68,000

12/31/19

Loss due to market decline of inventory

$7,000

Allowance to reduce inventory to market

$7,000

04

Calculation of loss in 2019

Inventory loss in 2019 is calculated as follows:

LossDuetoMarketdecline=Reductionin2019-AllowanceBalnecin2018=$75,000-$68,000=$7,000

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Most popular questions from this chapter

Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2018 at a cost of \(1,000,000. At December 31, 2017, the raw materials to be purchased have a market value of \)950,000. Prepare any necessary December 31, 2017, entry.

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

Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2018. Inventory, October 1, 2018 At cost \( 52,000 At retail 78,000 Purchases (exclusive of freight and returns) At cost 272,000 At retail 423,000 Freight-in 16,600 Purchase returns At cost 5,600 At retail 8,000 Markups 9,000 Markup cancellations 2,000 Markdowns (net) 3,600 Normal spoilage and breakage 10,000 Sales revenue 390,000 Instructions (a) Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-or-market inventory for October 31, 2018. (b) A department store using the conventional retail inventory method estimates the cost of its ending inventory as \)60,000. An accurate physical count reveals only $47,000 of inventory at lower-of-cost-or-market. List the factors that may have caused the difference between the computed inventory and the physical count.

In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases. Cases 1 2 3 4 5 Cost \(15.90 \)16.10 \(15.90 \)15.90 $15.90 Sales price 14.80 19.20 15.20 10.40 17.80 Estimated cost to complete 1.50 1.90 1.65 .80 1.00 Estimated cost to sell .50 .70 .55 .40 .60

Question:The conventional retail inventory method yields results that are essentially the same as those yielded by the lower-of-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.
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