Question

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

Short answer

(a) Under the cost of goods sold method, the decline in inventory will be recorded by debiting the cost of goods sold and crediting inventory by $21,000, respectively.

(b) Under the loss method, it will be recorded by debiting the loss due to the decline of inventory to NRV and crediting inventory by $21,000, respectively.

Step-by-step solution

Calculation of inventory decline

The inventory at cost equals $286,000 and NRV equals $265,000. Hence, per the LCNRV method, the inventory value equals $265,000.

The decline in the value of inventory is calculated as follows:

$$\begin{gathered} Decline=Cost-LCNRV \\ =\$286,000-\$265,000 \\ =\$21,000 \end{gathered}$$

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 NRV	$21,000
	Inventory		$21,000