Dover Company began operations in 2012 and determined its ending inventory at co

Question

Dover Company began operations in 2012 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31,2012, and December 31, 2013. This information is presented below.

12/31/12 Cost $346,000, lower of cost or market $322,000

12/31/13 Cost $410,000, lower of cost or market $390,000

Prepare the journal entries required at December 31, 2012, and December 31, 2013, assuming that the inventory is recorded at lower-of-cost-or-market, and a perpetual inventory system. Assume the cost-of-goods-sold method with no allowance used.

Prepare journal entries required at December 31, 2012, and December 31, 2013, assuming that the inventory is recorded at lower-of-cost-or-market, and a perpetual inventory system. Assume the loss method with an allowance used.

Which of the two methods above provides the higher net income in each year?

Explanation / Answer

A:

12/31/12

Debit: Cost of Goods Sold: 24000.00
       Credit: Inventory: 24000.00

12/31/13

Debit: Cost of Goods Sold: 20000.00
       Credit: Inventory: 20000.00

B:

12/31/12

Debit: Loss Due to Market Decline: 24000.00

       Credit: Allowance to Reduce Inventory to Market: 24000.00

12/31/13

Debit: Allowance to Reduce Inventory to Market: 4000.00

       Credit: Recovery of Loss Due to Market Decline of Inventory: 4000.00

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