Yousef Company began operations in 2009 and determined its ending inventory at c

Question

Yousef Company began operations in 2009 and determined its ending inventory at cost and at lower of cost market at December 31, 2009 and December 21, 2010 as follows:

                    Cost           Lower of cost or Market

12/31/2009   1,000.000         990,000

12/31/2010   2,000,000         1,985,000

Assuming the allowance method was used and that no inventory had to be written off during 2010, the adjusting journal entry required at December 31, 2010 includes which of the following?

Answer: a debit to loss in inventory for 5,000

Please explain answer in detail.

Explanation / Answer

Hi,

Please find the answer as follows:

Loss of Value as on 31/12/2009 (as market value is less than the cost) = 1000000 - 990000 = 10000

Loss of Value as on 31/12/2010 (as market value is again less than the cost) = 2000000 - 1985000 = 15000

Since the value of loss has increased from 10000 to 15000, a debit to loss in inventory for 5000 (15000 - 10000) will be recorded under the allowance method.

Thanks.

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