Question

Sheffield Company began operations in 2019 and determined its ending inventory at cost and at lower-of-LIFO cost-or-market at December 31, 2019, and December 31, 2020. This information is presented below:

		Cost		Lower-of-Cost-or-Market
12/31/19		$374,910		$356,490
12/31/20		393,900		379,680

(a) Prepare the journal entries required at December 31, 2019, and December 31, 2020, assuming that the inventory is recorded at market, and a perpetual inventory system (cost-of-goods-sold method) is used. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
12/31/19
12/31/20

(b) Prepare journal entries required at December 31, 2019, and December 31, 2020, assuming that the inventory is recorded at market under a perpetual system (loss method is used). (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
12/31/19
12/31/20

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

Cost-of-goods-sold method, Loss method. Both methods have the same effect

Answer 1

solution = a - cost of Inventory at 31 Dec 2019 Lower of cost or Market at 31 Dec 2014 374910 (356490) 18420 Allowance amount needed to reduce Inventory to market (a) cost of Inventory at 31 Dec 2020 Lower of cost of Market at 31 Dec 2020 Allowance amount needed to reduce Inventory to market (6) 393900 (349680) 14220. Recovery of previously recognized loss = (a) (b) c 18420 -14220 = 4220 Journal entry :- bate Description Debit Gedet 18420 18420 | 31 De 191 Cost of goods sold Allowance to reduce. . Inventory to Market IS To reduce allowance to reduce Inventory ] 31 Dec 20 Allowance to reduce - Inventory to C Market Cost of goods sold [To record the previously recognized Loss] 4220 4220 51

b) Journal entry, Date Descrlption Debit Gredit 31-Dec-19 18420 Recovery of loss Inventory Allowance to reduce Inventory 18420 - to Market 31-Dec-20 4200 |[ To reduce the loss due to decline in Inventory ] Allowance to reduce Inventory S to market Recovery of loss Inventory [To record the recognized loss] 4200 e) They both provide the same Net Income.