Chapter 8, Problem 16P

(Appendix 8.1) Inventory Write-Down Frost Company’s inventory records tor the years 2019 and 2020 reveal the cost and market of the January 1, 2019, inventory to be $125,000. On December 31, 2019, the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2020, market value of inventory was $140,000, and the cost was only $135,000. Frost uses a periodic inventory system. Purchases for 2019 were $100,000 and for 2020 were $110,000.

Required:

1. 1. Assume the inventory that existed at the end of 2019 was sold in 2020. Prepare the journal entries at the end of 2019 and 2020 to record the lower of cost or net realizable value under the (a) allowance method and (b) direct method.
2. 2. Prepare the cost of goods sold section of the income statement and show how the company would record the inventory on its balance sheet for 2019 and 2020 under the (a) allowance method and (b) direct method.
3. 3. Next Level Refer to your answer for P8-3. How does the use of a periodic inventory system versus a perpetual inventory system affect the valuation of inventory and the amount reported as income?