Bluebell Enterprises Ltd.’s records reported an inventory cost of $55,600 and a net realizable value of $54,000 at December 31, 2018. At December 31, 2019, the records indicated a cost of $68,700 and a net realizable value of $61,625. All opening inventory had been sold during the year.

a. Assuming that Bluebell Enterprises uses a perpetual inventory system, prepare the December 31, 2019 entry that is needed under (1) the direct method and (2) the indirect method.

b. Assume that at December 31, 2020, the records indicate inventory with a cost of $60,000 and a net realizable value of $60,900. Prepare the December 31, 2020 entry that is needed under (1) the direct method and (2) the indirect method. Explain why a “gain” is reported under the indirect method of accounting.