Question

Malone Company determined its ending inventory at cost and at LCNRV at December 31, 2017, December 31, 2018, and December 31, 2019, as shown below. Cost NRV 12/31/17 \(650,000 \)650,000 12/31/18 780,000 712,000 12/31/19 905,000 830,000 Instructions (a) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to LCNRV is used. (b) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory is recorded at cost and reduced to LCNRV using the loss method.

Short answer

a. Journal entries under the cost of goods sold method are given in Step 2.

b. Journal entries under the loss method are given in Step 3.

Step-by-step solution

Calculation of LCRNRV and reduction in inventory

LCNRV for each date is calculated as follows:

	Cost	NRV	LCNRV	Reduction in Inventory (Cost – LCNRV)
12/31/17	$650,000	$650,000	$650,000	$0
12/31/18	780,000	712,000	712,000	68,000
12/31/19	905,000	830,000	830,000	75,000

Journal entries under cost of goods sold method

Journal entries under cost of goods sold method

a. Journal entries are as follows:

Date	Description	Debit	Credit
12/31/17	No Entry
12/31/18	Cost of goods sold	$68,000
	Inventory		$68,000
12/31/19	Cost of goods sold	$75,000
	Inventory		$75,000

Journal entries under the loss method

(b) Journal entries are as follows:

Date	Description	Debit	Credit
12/31/17	No Entry
12/31/18	Loss due to market decline of inventory	$68,000
	Allowance to reduce inventory to market		$68,000
12/31/19	Loss due to market decline of inventory	$7,000
	Allowance to reduce inventory to market		$7,000

Calculation of loss in 2019

Inventory loss in 2019 is calculated as follows:

$$\begin{gathered} \mathbf{LossDuetoMarketdecline}\mathbf{=}\mathbf{Reductionin}\mathbf{2019}\mathbf{-}\mathbf{AllowanceBalnecin}\mathbf{2018} \\ \mathbf{=}\mathbf{\$}\mathbf{75}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{68}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{000} \end{gathered}$$