Question

The inventories of Berry Company for the years 2016 and 2017 are as follows: Cost Market January 1, 2016 $10,000 $10,000 December 31, 2016 13,000 11,500 December 31, 2017 15,000 14,000 Berry uses a perpetual inventory system. Required: 1. Assume the inventory that existed at the end of 2016 was sold in 2017. Prepare the necessary journal entries at the end of each year to record the correct inventory valuation if Berry uses the: a. direct method b. allowance method

Answer 1

Answer:

Direct method:

December 2016:

Dr     costs of sale              $1,500

Cr     inventory                                    $1,500

to record the reduction in value of inventory

December 2017

Dr     costs of sale              $1,000

Cr     inventory                                    $1,000

to record the reduction in value of inventory

indirect method:

December 2016:

Dr    inventory allowance expense            $1,500

Cr    provision for inventory  allowance                       $1,500

to record the reduction in value of inventory

December 2017:

Dr    inventory allowance expense            $1,000

Cr    provision for inventory  allowance                       $1,000

to record the reduction in value of inventory

Explanation:

Under the direct method of inventory valuation,the reduction in inventory value is debited directly to costs of sale and credited to inventory in order to write down inventory to lower of cost and market value

The loss on inventory valuation in December 2016 is $1500($13,000-11,500) the amount by which cost is higher than market value.

The loss on inventory valuation in December 2017 is $1000($15,000-14000) the amount by which cost is higher than market value.

However, under the indirect method,the diminution in value of inventory is credited to  allowance provision account in the balance sheet and debited to allowance expense account in the income statement