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

Date	Particulars	Debit($)	Credit($)
Dec. 31, year 6	Loss due to decline to NRV($585000-$525000)	60000
	Allowance due to decline to NRV		60000
	(To record the inventory at NRV)
Dec. 31, year 7	Allowance due to decline to NRV$60000-($780000-$740000)	20000
	Recovery of losses due to decline to NRV		20000
	(To record inventory at NRV and reduce the balance of allowance because at year 7, the balance of allowance should be $ 40000($780000 - $ 740000)