ed has two items in inventory as of December 31,2014. Each item was purchased fo
ID: 2411480 • Letter: E
Question
ed has two items in inventory as of December 31,2014. Each item was purchased for $40 couragement chose to write down Item #1 to $28, which at year-end was assessed to be its market ment did not write down Item #2 because its market value was estimated to be greater than Incorporat Manage During 2015, each item was sold for $50 cash ec ej mal entries for each activity (ie the write-down, the sale of Item #1 and the sale of Item #2) Grphin how management could manipulate reported earnings when applying the lower-of-cost-or- te the profit or loss associated with each item in 2014 and 2015, Bplain how management could manipulate reported earnings when applying the market rule.Explanation / Answer
(a) Journal Entries for each activity date General Journal Debit Credit For Write down item #1 2014 Writedown Damaged Goods A/c $12 To Inventory item #1 $12 (Being invenotry item #1 has Been value at Lower of Cost or market value ($40-$28) 2015 Sale of item #1 Cash A/c $50 To Inventory item #1 $28 To Profit & Loss A/c $22 (being item #1 has been sold at $50) 2015 Sale of item #2 Cash A/c $50 To Inventory item #2 $40 To Profit & Loss A/c $10 (being item #2 has been sold at $50) (b) profit & Loss associated With each item in 2014 and 2015 2014 2015 item #1 ($12) $22 item #2 $10 Profit & Loss ($12) $32 (c ) How management Colud maniplate reported earnings when applying the Lower of Cost or market Value management can maniplate the Profit , By reducing the Invenotry value using the method Lower Cost or market value. It Can reduces the profit by reducing the Inventory value below the Cost , recognise the reduction price of inventory has Expenses to the profit and Loss statement.it results Lower profit or Sometime even generate loss instead of profits
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