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

CHART OF ACCOUNTS

Chapter 8

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
131	Inventory
132	Allowance to Reduce Inventory to Market
141	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings
391	Income Summary

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
505	Loss Due to Market Valuation
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

General Journal Q1:

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)

(THERE IS ONLY ROOM FOR 2 JOURNAL ENTRIES (1 DR 1 CR EACH, 1 EXTRA SPACE OF NEEDED)

General Journal Q2:

Assume Frost uses the direct 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)

(THERE IS ONLY ROOM FOR 2 JOURNAL ENTRIES (1 DR 1 CR EACH)