3. Farmin gton Company uses a perpetual inventory system and values its inventor

Question

3. Farmin gton Company uses a perpetual inventory system and values its inventory at lower of cost or market. Its accounting records indicate the following information relating to inventory: Inventory Date January 1, 2017 December 31, 2017 December 31, 2018 Cost Market S 60,000 88,000 115,000 104,000 $ 60,000 Required: Prepare the required journal entries at December 31, 2017, and December 31,2018, to record the inventory at lower of cost or market using the following methods a. Direct method b. Allowance method

Explanation / Answer

Answer a. Direct Method Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31-Dec-17 Cost of Goods Sold                                              Dr.    12,000.00 $100,000 - $88,000 To Inventory    12,000.00 (Record the ending inventory at lower of cost or market value) 31-Dec-18 Cost of Goods Sold                                              Dr.    11,000.00 $115,000 - $104,000 To Inventory    11,000.00 (Record the ending inventory at lower of cost or market value) Answer b. Allowance Method Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31-Dec-17 Loss due to Market Valuation                             Dr.    12,000.00 $100,000 - $88,000 To Allowance to Reduce Inventory to Market    12,000.00 (Record the ending inventory at lower of cost or market value) 31-Dec-18 Allowance to Reduce Inventory to Market   Dr.    10,000.00 $12,000 - $11,000 To Loss Recovery due to market Valuation    10,000.00 (Record the ending inventory at lower of cost or market value)

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