Question 5BE - Intermediate Accounting (Kieso)

Question

Kumar Inc. uses LIFO inventory costing. At January 1, 2017, inventory was \(214,000 at both cost and market value. At December 31, 2017, the inventory was \)286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.

Step-by-Step Solution

Answer

(a) To record the decline in inventory, the cost of goods sold will be debited, and the inventory will be credited by $21,000, respectively.

(b) To record the decline, the loss due to the decline of inventory to market will be debited, and the allowance to reduce inventory to market will be credited by $21,000, respectively.

Calculation of decline in inventory

Inventory at cost equals $286,000 and at market equals $265,000. Hence, per the lower-of-cost-or-market method, the inventory value equals $265,000.

The decline is calculated as follows:

 $$\begin{gathered} Decline =Cost -Lower of \cos t or market \\ =\$286,000-\$265,000 \\ =\$21,000 \end{gathered}$$

Journal entry under the cost of goods sold method

(a) Entry under the cost of goods sold method is as follows:

Date	Accounts	Debit	Credit
	Cost of Goods Sold	$21,000
	Inventory		$21,000

Journal entry under the loss method

(b) Entry under the loss method is as follows:

Date	Accounts	Debit	Credit
	Loss Due to Decline of Inventory to Market	$21,000
	Allowance to Reduce Inventory to Market		$21,000