QUESTION 1

The inventory records of Frost Company for the years 2016 and 2017 reveal the cost and market of the January 1, 2016, inventory to be $125,000. On December 31, 2016, the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2017, market value of inventory was $140,000, and the cost was only $135,000. Frost uses a perpetual inventory system.

Required:

1.

Assume the inventory that existed at the end of 2016 was sold in 2017. Prepare the journal entries at the end of 2016 and 2017 to record the lower of cost or market under the:

	a. allowance method
	b. direct method

2.

Show the presentation of cost of goods sold and inventory on Frosts income statement and balance sheet for 2016 and 2017 under the:

	a. allowance method (assume the cost of goods sold prior to applying the lower of cost or market was $595,000 and $605,000 for 2016 and 2017, respectively)
	b. direct method

general journal

Assume Frost uses the allowance method and a perpetual inventory system.

Prepare the necessary journal entries to record:

	1. the correct inventory valuation on December 31, 2016
	2. the reduction in inventory when the inventory from December 31, 2016 is sold during 2017 Additional Instructions
	3. the correct inventory valuation on December 31, 2017 (if necessary)