Chapter 8, Problem 3P

Inventory Write-Down The inventory records of Frost Company for 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 perpetual inventory system.

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:
   1. a. allowance method
   2. b. direct method
2. 2. Show the presentation of cost of goods sold and inventory of Frost’s income statement and balance sheet for 2019 and 2020 under the:
   1. a. allowance method (assume the cost of goods sold prior to applying the lower of cost or net realizable value rule was $595,000 and $605,000 for 2019 and 2020, respectively)
   2. b. direct method