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
