Question

The A&J Company uses the Lower of Cost or Net Realizable Value method to value its inventory. At the end of 2016 A&J had a balance of $42,000 in the Allowance to Reduce Inventory to NRV account.

Inventory Cost and NRV data for December 31, 2017, 2018 and 2019 is shown below:

Cost LCNRV

2017 $822,000 $760,000

2018 $829,000 $789,000

2019 $935,000 $885,000

Required:

1)Prepare journal entries for December 31, 2017, December 31, 2018 and December 31, 2019 assuming the inventory is recorded at LCNRV and a perpetual inventory system is used. Assume the loss method with an allowance is used.

2)Prepare journal entries for December 31, 2017, December 31, 2018 and December 31, 2019 assuming the inventory is recorded at LCNRV and a perpetual inventory system is used. Assume the cost of goods method with an allowance is used.

3)What is the net inventory value that would appear on the balance sheet for both methods at the end of 2019?

Question # 2

The M&E Company had a fire that destroyed most of its inventory and would like to put in a claim with its insurance company. Records indicate the following:

Inventory (beg of year): $160,000 Sales revenue: $880,000

Purchases: $580,000 Sales returns: $ 42,000

Purchase returns: $ 56,000 Freight in: $ 5,000

Gross profit based on selling price: 40%

Merchandise inventory at cost totaled $12,000 and merchandise inventory with a selling price of $40,000 (hint, must convert to cost) remained undamaged.

Required:

Calculate the amount of inventory loss that M&E can claim.