Question

	Jan 31	?Feb 28	Mar 31	Apr 30
Inventory at cost	15,000	15,100	17,000	14,000
Inventory at LCNRV	14,500	12,600	15,600	13,300
Purchases for the month		17,000	24,000	26,500
Sales for the month		29,000	35,000	40,000

(a)  

From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost; the gain or loss due to market fluctuations is to be shown separately (using a valuation account).

(b)  

Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly therea

?Why is there is difference between the end inventory cost in Jan and the beginning cost of the inventory in Feb if no transactions took place in Jan ? Also, when I tried to work this problem out there was also differences in the ending inventory of current month and beginning inventory of the next month ? If it has to do with the LCNRV, why would you put the lower of the two in the income statement, since the directions say that inventory is to be stated at cost in the income statement ? (You do not have post the solution to the problem above)

Answer 1

Why is there is difference between the end inventory cost in Jan and the beginning cost of the inventory in Feb if no transactions took place in Jan?

Answer : As per GAAP requirements Inventory has to be valued at Cost or NRV which ever is lower. So Lower of January is 14500 which will be the beginning inventory of Feb month.

why would you put the lower of the two in the income statement, since the directions say that inventory is to be stated at cost in the income statement ?

Answer : For valuation of Inventory at Lower of cost or NRV we have to recognise expenses seperately in the profit and loss account to adjust the cost of Inventory.

Question also says that gain or loss due to market fluctuations is to be shown separately (using a valuation account).

As you have mentioned in the questions not to solve. I have just addressed your queries.

If you have any further doubt please comment and ask answer.