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Question 5BE

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Intermediate Accounting (Kieso)
Found in: Page 475

Short Answer

Kumar Inc. uses LIFO inventory costing. At January 1, 2017, inventory was $214,000 at both cost and market value. At December 31, 2017, the inventory was $286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.

(a) To record the decline in inventory, the cost of goods sold will be debited, and the inventory will be credited by $21,000, respectively.

(b) To record the decline, the loss due to the decline of inventory to market will be debited, and the allowance to reduce inventory to market will be credited by $21,000, respectively.

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Step by Step Solution

Calculation of decline in inventory

Inventory at cost equals $286,000 and at market equals $265,000. Hence, per the lower-of-cost-or-market method, the inventory value equals $265,000.

The decline is calculated as follows:

Journal entry under the cost of goods sold method

(a) Entry under the cost of goods sold method is as follows:

Date

Accounts

Debit

Credit

Cost of Goods Sold

$21,000

Inventory

$21,000

Journal entry under the loss method

(b) Entry under the loss method is as follows:

Date

Accounts

Debit

Credit

Loss Due to Decline of Inventory to Market

$21,000

Allowance to Reduce Inventory to Market

$21,000

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