Corrs Company began operations in 2016 and determined its ending inventory at co
ID: 2563758 • Letter: C
Question
Corrs Company began operations in 2016 and determined its ending inventory at cost and at lower-of-LIFO cost-or-market at December 31, 2016, and December 31, 2017. This information is presented below:
Cost
Lower-of-Cost-or-Market
(a) Prepare the journal entries required at December 31, 2016, and December 31, 2017, assuming that the inventory is recorded at market, and a perpetual inventory system (cost-of-goods-sold method) is used.
(b) Prepare journal entries required at December 31, 2016, and December 31, 2017, assuming that the inventory is recorded at market under a perpetual system (loss method is used).
(c) Which of the two methods above provides the higher net income in each year? Both, COGS Method, or Loss Method?
Cost
Lower-of-Cost-or-Market
12/31/16 $356,000 $327,000 12/31/17 420,000 395,000Explanation / Answer
Answer a The journal entries required at December 31, 2016, and December 31, 2017 (Cost of goods sold method) Date Account Titles Debit Credit Dec.31,2016 Cost of goods sold $29,000 Inventory $29,000 (to reduce inventory from cost to market value) Dec.31,2017 Cost of goods sold $25,000 Inventory $25,000 (to reduce inventory from cost to market value) Answer b The journal entries required at December 31, 2016, and December 31, 2017 (Loss method) Date Account Titles Debit Credit Dec.31,2016 Loss due to market decline of Inventory $29,000 Allowance to reduce inventory to market $29,000 (to establish a separate contra asset account and write off the loss on inventory from cost to market value) Dec.31,2017 Loss due to market decline of Inventory $25,000 Allowance to reduce inventory to market $25,000 (to establish a separate contra asset account and write off the loss on inventory from cost to market value) Answer c Cost of goods sold method provides the higher net income in 2016 & 2017 - In 2016 & 2017 , Increase in COGS and decrease in Inventory has NIL impact on operating Income where as under loss method , the loss in inventory value recorded as expense resulting into lower operating income.