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Journal Entries - Inventory Valuation

Mary Stuart Company determined its ending inventory at cost and at lower of cost or market at December 31, 2007 and December 31, 2008 as shown below:
Cost Lower-of-cost-or-market
12/31/2006 $650,000 $650,000
12/31/2007 $780,000 $722,000
12/31/2008 $900,000 $830,000

Instructions:

(A) Prepare the journal entries required at December 31, 2007 and at December 31, 2008 assuming that a perpetual inventory system and the direct method of adjusting to market is used.
(B) Prepare the journal entries required at December 31, 2007 and at December 31, 2008 assuming that a perpetual inventory is recorded at cost and reduced to market through the use of an allowance account (indirect method).

Remit in excel format

Solution Preview

Please see the attached file

(a) In the direct method of adjusting, the difference between the cost and lower of cost is
directly debited to cost of goods sold and the inventory value is reduced.
In 2006, the value of cost and lower of cost and market is the same and so
no adjustment is needed.
In 2007, the lower of cost is ...

Solution Summary

The solution explains the journal entries relating to inventory valuation

$2.19