Question

Year 6 is the first year of operation for Bob the Builder. The following information is available for Bob's inventories:

      December 31, Year 6:

      At cost:  $585,000;

      At lower of cost and net realizable value (NRV): $525,000

      December 31, Year 7:

      At cost: $780,000;

      At lower of cost and net realizable value (NRV): $740,000

Prepare Bob's Year 7 journal entry to adjust its inventory from cost to the lower of cost and NRV, assuming the allowance method is being used.

Answer 1

Solution:

Date	Account Name	Debit	Credit
Year 7	Allowance to reduce inventory to NRV [(585000-525000)-(780000-740000)]	$        20,000
	Recovery of Inventory Losses		$        20,000
	(To record recovery of losses)

Notes:

1) Year 6, Loss of inventory is $60,000 [ 585000-525000] and in Year 7 such loss is decreased to $ 40,000 [ 780000-740000]. So, We have to write a journal entry to show that there is a recovery of $20,000[60000-40000] losses in year 7.